(Purchase Price of Asset - Approximate Salvage Value) Estimated Useful

Life of Asset

Example: You buy a new computer for your business costing approximately

$5,000. You expect a salvage value of $200 selling parts when you dispose of it.

Accounting rules allow a maximum useful life of five years for computers. In the

past, your business has upgraded its hardware every three years, so you think

this is a more realistic estimate of useful life, since you are apt to dispose

of the computer at that time. Using that information, you would plug it into the

formula:

($5,000 purchase price - $200 approximate salvage value) 3 years estimated

useful life

The answer, $1,600, is the depreciation charges your business would take

annually if you were using the straight line method.