Depreciation for our purposes will be the lost value on equipment and interest paid during their use. This is not the I.R.S. method, but one I have found to be valid. This method can be used as a guide to calculate what amount of depreciation you take so you don't over or under depreciate your equipment. This issue is a calculated cost because, again you have to use variables or unknown. You know what you paid for the equipment. You also need to know what that equipment will be worth when you go to sell or trade it. One way to help you calculate that cost is to look through equipment magazines. Find equipment that has aged the years you plan to keep your equipment and see what its value is. After finding as many of those pieces of equipment that you can, add their sale prices up. Then divide that figure by the number of pieces of equipment you added to arrive at a figure. This will give you an average selling or trade price for your equipment when you go to sell or trade. This method isn't 100% accurate but future telling never is. The only time this figure will be 100% accurate is when you actually sell or trade the equipment. You then take your purchase price of the equipment and subtract your selling or trade price giving you a loss on equipment value. You then add the figure for loss on equipment to the interest total, if you have any, for the life of the loan. Divide that figure by the estimated miles you will utilize that equipment. This will give a cost per mile for depreciation. Let's give you an example. You purchased a truck for $35,000.00. You plan to use this equipment for four years. By your research in equipment magazines you arrive at a figure that the equipment will be worth $18,000.00 when you sell or trade. You subtract your sell or trade price of $18,000.00 from the purchase price of $35,000.00 to arrive at a $17,000.00 loss. Then add to that figure, any interest paid on the loan for that equipment. Let's say our interest is $12,600.00 for the life of the loan. We then need to add our interest of $12,600.00 to our loss figure of $17,000.00 giving us a total loss of $29,600.00. Now we need to calculate our mileage for the life of our equipment. Let's say we estimate that we will cover 100,000 miles a year for a period of 4 years. Multiply 100,000 miles a year by 4 giving us 400,000 miles. Then divide our equipment loss of $29,600 by the miles 400,000 giving us a figure of .074 per mile in depreciation.
This is the formula for calculating cost per mile.
PURCHASE PRICE - PREDICTED SELL OR TRADE PRICE + INTEREST ON LOAN + ESTIMATED MILEAGE = DEPRECIATION COST PER MILE
This is the formula for calculating cost per day.
PURCHASE PRICE - PREDICTED SELL OR TRADE PRICE + INTEREST ON LOAN + YEARS OWNED x 365 or 260 = COST PER DAY
COMPARABLE UNITS PRICE
NUMBER OF UNITS ADDED ~______________
ESTIMATED SELLING PRICE =______________
PURCHASE PRICE _____________
SELLING PRICE -_____________
INTEREST PAID +_____________
TOTAL =_____________ _______________
MILES UTILIZED ~_____________~ DAYS 365 OR 260
COST PER MILE =_____________= _______________(COST PER DAY)