An asset with a first cost of $250,000 is expected to have a maximum useful life of 10 years and a market value that decreases $25,000 each year. The annual operating cost is expected to be constant at $25,000 per year for 5 years and to increase at a substantial 25% per year thereafter. The interest rate is a low 4% per year, because the company, Public Services Corp., is majority-owned by a municipality and regarded as a semiprivate corporation that enjoys public project interest rates on itsloans. (a)Verify that the ESL is 5 years. Is the ESL sensitive to the changing market value and AOC estimates?
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 with a first cost of $250,000 is
expected to have a maximum useful life of 10
years and a market value that decreases $25,000
each year. The annual operating cost is expected
to be constant at $25,000 per year for 5 years and
to increase at a substantial 25% per year
thereafter. The interest rate is a low 4% per year,
because the company, Public Services Corp., is
majority-owned by a municipality and regarded as
a semiprivate corporation that enjoys public project
interest rates on itsloans. (a)Verify that the ESL is
5 years. Is the ESL sensitive to the changing
market value and AOC estimates?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 4 images
