EOBII Publishers, a competitor of Burrows, recently bought a printing press for $2,000,000 to be depreciated to zero by the straight-line method over five years. This implies yearly depreciation of $400,000 ( = $2,000,000 / 5 ) . Is this $400,000 figure a real or a nominal quantity?

Depreciation is a nominal quantity because $400,000 is the actual tax deduction over each of the next five years. Depreciation becomes a real quantity if it is adjusted for purchasing power.

Assuming an annual inflation rate of 6 percent, depreciation in the fourth year expressed as a real quantity is $316,837 ( = $400,000 / 1.06 ⁴ ).