A transportation company purchased a gasoline truck 5 years ago for $10,000.00. At that time, the truck's useful life was estimated at 10 years with a residual value of $1,000.00. Currently the truck can be sold for $2,800.00. The annual operation and maintenance costs for the next years are given by Cj =$2000 (1.10)j-1 (obs: j= 1, 2, 3, 4, 5). The company is considering replacing the current truck with an electric-powered truck that costs $8,000.00, has an estimated useful life of 10 years and a residual value that decreases by $600.00 per year. Annual operating and maintenance costs total $2,000.00. Determine for a minimum acceptable rate of return 10% per annum whether replacement should be made. (Answer: Substitution should not be done).
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A transportation company purchased a gasoline truck 5 years ago for $10,000.00. At that time, the truck's useful life was estimated at 10 years with a residual value of $1,000.00. Currently the truck can be sold for $2,800.00. The annual operation and maintenance costs for the next years are given by Cj =$2000 (1.10)j-1 (obs: j= 1, 2, 3, 4, 5). The company is considering replacing the current truck with an electric-powered truck that costs $8,000.00, has an estimated useful life of 10 years and a residual value that decreases by $600.00 per year. Annual operating and maintenance costs total $2,000.00. Determine for a minimum acceptable
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