Is the Written Down Value (WDV) method of charging depreciation more convenient to compute in scenarios involving project evaluation, cash flow in capital budgeting, and taxation? Contrary to common belief, many assume that the Straight-Line Method (SLM) is simpler than the WDV method. However, the reality is that computing depreciation can be more straightforward with WDV. Unless explicitly stated to charge the full cost of the asset as depreciation, users are typically expected to deduct the salvage value while computing depreciation under SLM. This extra step is unnecessary with the WDV method. With a given depreciation rate, one can swiftly compute depreciation under the WDV method compared to any other method.
Curious about how this works? Let's walk through an example that will demonstrate why WDV computation is indeed easier than other methods.
Imagine the cost of an asset is Rs. 10,000 and the depreciation rate is 25% under the WDV method. Note that when the depreciation rate is 25%, the WDV rate (the carrying value of the asset after charging depreciation) will be 75% (100% - 25%). In the first year, the depreciation charge would be 25% of Rs. 10,000, i.e., Rs. 2,500. For subsequent years, the depreciation is calculated by applying 75% of the previous year's depreciation. For instance, in the second year, it would be 75% of Rs. 2,500, which is Rs. 1,875. Similarly, for the third year, it would be 75% of Rs. 1,875, resulting in Rs. 1,406. This process can be efficiently performed using a calculator by entering 0.75 twice before applying Rs. 2,500 for the second year. For subsequent years, one only needs to press the equals (=) sign on the calculator. This method makes each year's depreciation calculation visible, simplifying the process and enhancing efficiency.
Give it a try and experience the ease of WDV computation. Enjoy the simplicity!
