Buying animals and tools

Let us take two farmers, Toumba and Gambara.
Toumba and Gambara each buy

Toumba buys a plough for 8000 francs. In 5 years the plough is worn out. Toumba has to buy another one. He needs money. But he never thought of putting aside any money. So he cannot buy a new plough. Toumba cannot use his oxen any more. He cannot farm with animal power.

Gambara also buys a plough for 8 000 francs. At the end of 5 years the plough is worn out. But Gambara has put some money aside every year. So he can buy a new plough and go on farming with animal power.

How much money be put aside?

Putting money aside to replace tools or oxen is called amortization.

· To replace a plough

The plough costs 8 000 francs.

It lasts 5 years.

To get 8 000 francs in 5 years, you must put aside each year

8 000 /5= 1 600 francs

These 1 600 francs are the amortization of the plough.

· To replace the oxen

The oxen cost 32 000 francs.

After 6 years they are too old and are sold for 20 000 francs.

In 6 years the oxen have lost in value

32 000 francs less 20 000 francs = 12 000 francs.

In order to have enough money in 6 years' time to buy new oxen a farmer must put money aside every year for the amortization of the oxen, that is:

francs /6= 2 000 francs.

For the amortization of the plough and the oxen the farmer must put aside every year

1 600 francs plus 2 000 francs = 3 600 francs.