. Five years ago, a company in New Jersey installed a diesel-electric unit costing $50,000 at a remote site because no dependable electric power was available from a public utility. The company has computed depreciation by the straight-line method with a useful life of 10 years and a zero salvage value. Annual operation and maintenance expenses are $16,000, and property taxes and insurance cost another $3,000 per year. Dependable electric service is now available at an estimated annual cost of $30,000. The company in New Jersey wishes to know whether it would be more economical to dispose of the diesel-electric unit now, when it can be sold for $35,000, or to wait five years when the unit would have to be replaced anyway (with no MV). The company has an effective income tax rate of 50% and tries to limit its capital expenditures to opportunities that will earn at least 15% per year after income taxes. What would you recommend?
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.
4. Five years ago, a company in New Jersey installed
a diesel-electric unit costing $50,000 at a remote site
because no dependable electric power was available
from a public utility. The company has computed
10 years and a zero salvage value. Annual operation and
maintenance expenses are $16,000, and property taxes
and insurance cost another $3,000 per year.
Dependable electric service is now available at an
estimated annual cost of $30,000. The company in
New Jersey wishes to know whether it would be more
economical to dispose of the diesel-electric unit now,
when it can be sold for $35,000, or to wait five years
when the unit would have to be replaced anyway (with
no MV). The company has an effective income tax rate
of 50% and tries to limit its capital expenditures to
opportunities that will earn at least 15% per year after
income taxes. What would you recommend?
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