In order for a company to calculate depreciation, and decide which type of calculation to use, they must first determine the rate of depreciation. This is done by considering three data points. One is a known cost and the other two are variables.
Original cost of the asset– this is the known cost. It is simply the price, in dollars, that the company paid for the asset. If they bought a bulldozer, on sale, for $90,000, that is the cost they use to calculate depreciation. They do not factor in the retail value. It is the cost of the asset to them.
Useful life of the asset– this is the number of years that a company plans to use this asset. A piece of heavy equipment may have a useful life of 10 years or more. Whereas new computers, or software, may have a much shorter useful life. However, this is considered a variable because a business can assign any value they wish.
Scrap value of the asset– this is the dollar value of the asset at the end of its useful life. It is called a variable because a company is free to assign any value they wish.