An investment centre has earned an accounting profit of $135,000, after charging historical cost depreciation of $22,000 and increasing the provision for doubtful debts by $8,000 to $12,000. If the non‐current assets had been valued at replacement cost the depreciation charge would have been $41,000. The net book value of the investment centre’s net assets is $420,000 and the replacement cost is estimated to be $660,000. The organisation’s risk adjusted cost of capital is 14% but it has a large bank loan which incurs annual interest charges of 10%. Ignoring taxation, the economic value added (EVA) for the investment centre is:
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 investment centre has earned an accounting profit of $135,000, after charging historical cost
The net book value of the investment centre’s net assets is $420,000 and the replacement cost is estimated to be $660,000. The organisation’s risk adjusted cost of capital is 14% but it has a large bank loan which incurs annual interest charges of 10%.
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