A firm is evaluating an investment in a fixed asset that costs $1,080, has a six-year life, and has no salvage value. Depreciation is straight line to zero over the life of the asset. The firm made the following estimates: price per unit = $12, number of units sold = 40, variable cost per unit = $5, and fixed costs = $60. The tax rate is 25% and the required return is 10%. Fnd the sensitivity of net present value to changes in variable cost per unit.
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 firm is evaluating an investment in a fixed asset that costs $1,080, has a six-year life, and has no salvage value.
Step by step
Solved in 4 steps with 5 images
