A drill press was purchased 4 years ago for $40,000. Its estimated salvage value after 7 years was $5000. The press can be sold for $15,000 today, or for $12,000, $9000, or $6000 at the ends of each of the next 3 years. The annual operating and maintenance cost for the next 3 years will be $2700 for this year and then will increase by $800 per year. What are the relevant cash flows for this 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.
A drill press was purchased 4 years ago for $40,000. Its estimated salvage value after 7 years was $5000. The press can be sold for $15,000 today, or for $12,000, $9000, or $6000 at the ends of each of the next 3 years. The annual operating and maintenance cost for the next 3 years will be $2700 for this year and then will increase by $800 per year. What are the relevant cash flows for this machine?
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