SLN / EFFECT / NOMINAL
SLN spreads an asset's cost evenly over its useful life; EFFECT and NOMINAL convert between a stated annual rate and the real rate once compounding is taken into account.
SLN, straight-line depreciation, gives the same depreciation amount every single period: cost minus salvage value, divided evenly across the asset's useful life. EFFECT and NOMINAL exist for a completely different reason: a stated "APR" and the real rate actually paid or earned aren't the same number once compounding happens more than once a year. EFFECT converts the stated, nominal rate up to the true effective rate; NOMINAL converts back down from a known effective rate to the stated one.
Syntax
| Argument | Description |
|---|---|
| cost | SLN: Required. What the asset cost new. |
| salvage | SLN: Required. What it's expected to be worth at the end of its useful life: 0 if nothing. |
| life | SLN: Required. The useful life, in the same time unit the depreciation figure should be per. |
| nominal_rate, effect_rate | EFFECT/NOMINAL: Required. The stated annual rate, or the true compounded rate; each one solves for the other. |
| npery | EFFECT/NOMINAL: Required. The number of compounding periods per year (12 for monthly, 4 for quarterly). |
A real example: the true cost behind a credit card's stated APR
A credit card advertising a 19.9% APR, compounded monthly:
The result, over 21.8%, is the real annual cost once monthly compounding is factored in, noticeably higher than the quoted 19.9%; EFFECT is exactly what reveals that gap between a stated rate and what a balance actually costs to carry.
Worked examples
| A | B | C | |
|---|---|---|---|
| 1 | Cost | Salvage value | Useful life (years) |
| 2 | 20000 | 2000 | 6 |
| A | B | |
|---|---|---|
| 1 | Stated APR | Compounds per year |
| 2 | 0.199 | 12 |
Common mistakes
- Quoting a credit card's stated APR as the real cost of carrying a balance. The true annual cost, once monthly compounding is factored in, is higher: that's exactly what EFFECT reveals.
- Using SLN on an asset that actually loses value faster early on (like a vehicle). SLN assumes even depreciation every period, which isn't always the realistic pattern.
- Mixing up EFFECT and NOMINAL's direction; EFFECT goes from the stated rate to the real one; NOMINAL goes the other way, from a known real rate back to the stated one.
Related functions
Try it yourself
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