Question

3) a) Brittany has bought a Chevy for $25,000. A week later she finds that she has to go to London for a year for a company assignment. She gives an advertisement in the newspaper saying that she needs to sell her car. She is surprised to find that the maximum offer she is getting for her week old car is $18,000. Can you explain why is this happening?

Answer 1

Answer - The term used for the reduction in the value of an asset with time or normal wear and tear is Depreciation. Hence in the above given situation , the car is being sold after 1 year of its purchase , hence with time the value of asset decreases because new models with advanced features come into the market. This is the reason why she is getting $ 18000 for her car , and not $ 25000 because it must be the book value of car after 1 year and depreciation.