Question

Question number 6

6. A car is brought for Rs. 10000. It loses value at a rate of 20 % each year.
a) Explain why the car is not worthless after 5 years.
b) Calculate its value after 5 years.
c) Explain why a depreciation of 20% per year means, in theory, that the car will never be worthless.

Answer 1

Dear student
$$\begin{gathered} \mathrm{Price}\mathrm{of}\mathrm{the}\mathrm{car}=\mathrm{Rs}10,000 \\ \mathrm{Depreciating}\mathrm{value}\mathrm{per}\mathrm{year}=20\%\mathrm{of}10,000=\mathrm{Rs}2,000 \\ \mathrm{So}\mathrm{value}\mathrm{of}\mathrm{car}\mathrm{after}1\mathrm{year}=10,000-2,000=\mathrm{Rs}8,000 \\ \mathrm{value}\mathrm{of}\mathrm{car}\mathrm{after}2\mathrm{year}=8,000-2,000=\mathrm{Rs}6,000 \\ \mathrm{value}\mathrm{of}\mathrm{car}\mathrm{after}3\mathrm{year}=6,000-2,000=\mathrm{Rs}4,000 \\ \mathrm{value}\mathrm{of}\mathrm{car}\mathrm{after}4\mathrm{year}=4,000-2,000=\mathrm{Rs}2,000 \\ \mathrm{value}\mathrm{of}\mathrm{car}\mathrm{after}5\mathrm{year}=2,000-2000=\mathrm{Rs}0 \\ \mathrm{So}\mathrm{its}\mathrm{value}\mathrm{after}5\mathrm{years}=\mathrm{Rs}0 \\ \mathrm{We}\mathrm{know}\mathrm{that}\mathrm{the}\mathrm{word}\mathrm{depreciation}\mathrm{means}\mathrm{a}\mathrm{reduction}\mathrm{in}\mathrm{the}\mathrm{value}\mathrm{of}\mathrm{an}\mathrm{asset}\mathrm{over}\mathrm{time},\mathrm{due}\mathrm{in}\mathrm{particular}\mathrm{to}\mathrm{wear}\mathrm{and}\mathrm{tear} \end{gathered}$$
Regards