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.
Lovewell Limited a food manufacturer is considering purchasing a new machine for £275,000. The
company is expecting an annual
outflow of £12,500 for each of the six years of the machine’s useful life. The annual
not include annual depreciation charges for the machine. The machine is
straight –line method. The machine is expected to last for six years, with a residual value estimated to
be at the rate of 15% of the original cost of the machine. The cost of capital for Lovewell Limited is
12%.
You are required to:
1. Calculate using the following investment appraisal techniques, and provide brief recommendations
as to the economic feasibility of acquiring the machine:
a. The Payback Period.
b. The Accounting
c. The Net Present Value.
d. The
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