Mwasalat Company wants to renovate one of its existing buses at cost of OMR 200,000 and the Company will incur a repair cost of OMR 20,000 at the end of 3rd year from now. If these costs are incurred, the bus will be useful for 6 years. After a 6-
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.
Mwasalat Company wants to renovate one of its existing buses at cost of OMR 200,000 and the Company will incur a repair cost of OMR 20,000 at the end of 3rd year from now. If these costs are incurred, the bus will be useful for 6 years. After a 6-year period, it will be sold at a salvage value of OMR 30,000. The total annual revenues of the bus will be OMR 260,000 and the total cost to operate the bus will be OMR 170,000 per year.
Alternatively, Mwasalat Company can purchase a new bus for OMR 190,000. The new bus will require some repairs at the end of the 6-year period at a cost of OMR15,000. Its salvage value will be OMR 40,000 after its useful life of 6 years. The total annual revenues of the new bus will be OMR 220,000 and its operating cost will be OMR 130,000 per year.
The company’s required
A)Should Mwasalat Company renovate the old bus or purchase a new bus? Justify your answer.
B)Would the above decision of Mwasalat Company will change if an specific inflation is the expected for annual operating cost of new buses only at rate 3% every year? Justify your answer.
C)Based on the above article, what are limitation of adopting NPV as capital budgeting techniques?
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