How to calculate average book value?

CFA Level I
#1

Hi, I realised that average book value is determined using (initial book value - salvage value)/2. Why divide by 2? Why not divide by the total project length? Appreciate some guidance… Thanks. Ange

#2

I think it should be (initial book value + salvage value)/2 let’s say initial book value is 5, depreciated by 1, salvage value of 1. 5, 4, 3, 2, 1 -> average = 3 (initial book value + salvage value)/2 = (5+1)/2 = 3

#3

To take the average of two numbers, you add them together, and then divide by 2. Not to sound like an ass, but that seems like fairly basic elementary math.

#4

qhuifong, are you confusing this with straight line depreciation? straight line dep = (original cost - salvage value)/useful life

#5

Hi, Thanks for the replies. Was just too stressed up to think straight! Ange