Problem 9-22) A hydraulic
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.
- (Problem 9-22) A hydraulic press was installed 10 years ago at a capital investment cost of $70,000. This press presently has a market value of $14,000. If kept, the press has an economic life of three years, operating expenses of $14,000 per year, and a market value of $10,000 at the end of year (EOY) three. The existing press is being depreciated by the
straight line method using a 15-year write-off period with an estimated salvage value fordepreciation purposes of $10,000.
As an alternative, the currently owned press can be replaced with an improved challenger press which will cost $65,000 to install, have operating expenses of $9,000 per year, and have a final market value of $10,000 at the end of its 20-year economic life. If the replacement is made, the challenger press will be depreciated with the straight line method over a 20-year life with an estimated salvage value of $10,000 at EOY 20. It is thought that a hydraulic press will be needed indefinitely.
If the after-tax MARR is 10% per year and the effective income tax rate is 40%, should the defender or the challenger be recommended?
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