An asset purchased 5 years ago for $75,000 can be sold today for $15,000. Operating expenses will be $10,000 this year, but these will increase by $1500 per year. It is estimated that the asset’s salvage value will decrease by $1000 per year over the next 5 years. If the MARR used by the company is 15%, calculate the total marginal cost of ownership of this old asset (that is, the currently implemented asset) for each of the next 5 years.
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.
An asset purchased 5 years ago for $75,000 can be sold today for $15,000. Operating expenses will be $10,000 this year, but these will increase by $1500 per year. It is estimated that the asset’s salvage value will decrease by $1000 per year over the next 5 years. If the MARR used by the company is 15%, calculate the total marginal cost of ownership of this old asset (that is, the currently implemented asset) for each of the next 5 years.
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