Thomas installed a new stove in his restaurant. At the time of installation, the stove had a value of $800.

Question

Thomas installed a new stove in his restaurant. At the time of installation, the stove had a value of $800. Thomas estimates that each year the value of the stove will depreciate by 20% of the previous year’s estimated value. What is the estimated value of the stove exactly 2 years after Thomas installed it?

A.

$480

B.

$512

C.

$556

D.

$640

Accepted Answer

Choice B is correct. If the stove&rsquo;s value depreciates by 20% of the previous year&rsquo;s estimated value, then each year it retains 100% - 20% = 80%, or 0.80, of the previous year&rsquo;s estimated value. Since the stove&rsquo;s value was $800 when Thomas installed it, the estimated value after two years would be (0.80)(0.80)($800) = $512. Choice A is incorrect. This is the value of the stove if each year it had depreciated by 20% of the original value rather than by 20% of the previous year&rsquo;s estimated value. Choice C is incorrect and may be the result of a computational error. Choice D is incorrect. This is the estimated value of the stove 1 year after Thomas installed it, not 2 years.

Question thomas