Consider a new electric forklift truck that would cost $18,000, have operating costs of $1,000 in the first year, and have a salvage value of $10,000 at the end of the first year. For the remaining years, operating costs increase each year by 15% over the previous year's operating costs. Similarly, the salvage value declines each year by 25% from the previous year's salvage value. The truck has a maximum life of seven years. Overhauls costing $3,000 and $4,500 will be required during the fifth and seventh years of service, respectively. The firm's required rate of return is 15%. Find the economic service life of this new machine.
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.
Consider a new electric forklift truck that would cost $18,000, have operating costs of $1,000 in the first year, and have a salvage value of $10,000 at the end of the first year. For the remaining years, operating costs increase each year by 15% over the previous year's operating costs. Similarly, the salvage value declines each year by 25% from the previous year's salvage value. The truck has a maximum life of seven years. Overhauls costing $3,000 and $4,500 will be required during the fifth and seventh years of service, respectively. The firm's required
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