A delivery car had a first cost of $30,000, an annual operating cost of $12,000, and an estimated $4000 salvage value after its 6-year life. Due to an economic slowdown, the car will be retained for only 2 years and must be sold now as a used vehicle. (a) At an interest rate of 10% per year, what must the market value of the 2-year-old vehicle be in order for its AW value to be the same as the AW for a full 6-year life cycle? (b) Compare your answer in (a) with the first cost and expected salvage after 6 years. Is the required market value a reasonable one, in your opinion?
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.
A delivery car had a first cost of $30,000, an annual
operating cost of $12,000, and an estimated
$4000 salvage value after its 6-year life. Due to
an economic slowdown, the car will be retained
for only 2 years and must be sold now as a used
vehicle.
(a) At an interest rate of 10% per year, what must
the market value of the 2-year-old vehicle be
in order for its AW value to be the same as
the AW for a full 6-year life cycle?
(b) Compare your answer in (a) with the first
cost and expected salvage after 6 years. Is the
required market value a reasonable one, in
your opinion?
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