Depreciation and the Time Value of Money

TL;DR

This paper introduces a depreciation method that incorporates the Time Value of Money to better estimate an asset's intrinsic value, aiding more rational purchase and sale decisions.

Contribution

It formulates a depreciation approach integrating the Time Value of Money, enhancing asset valuation accuracy beyond traditional methods.

Findings

Proposes a depreciation method aligned with intrinsic value

Improves decision-making for buyers and sellers

Lays groundwork for more complex valuation formulas

Abstract

Generally accepted depreciation methods do not compute the intrinsic value of an asset, as they do not factor for the Time Value of Money, a key principle within financial theory. This is disadvantageous, as knowing the intrinsic value of an asset can assist with making effective purchase and sale decisions. By applying the Time Value of Money principle to deprecation and book valuation, methods can be formulated to approximate the intrinsic valuation of a depreciable asset, which improves the capacity for buyers and sellers of assets to make rational decisions. A deprecation method is formulated within, which aims to better match book value with intrinsic value. While this method makes many assumptions and thus has limitations, more complex formulas, which factor for a greater number of variables, can be created using a similar approach, to produce better approximations for intrinsic value.