Eight years ago, a firm purchased a lathe for $45,000. The operating expenses for the lathe are $8,700 per year. An equipment vendor offers the firm a new machine for $53,500 with operating costs of $5,700 per year. An allowance of $8,500 would be made for the old machine on the purchase of the new one. The old machine was expected to be scrapped at the end of five years. The new machine's economic service life is five years with a salvage value of $12,000. The new machine's O&M cost is estimated to be $4,200 for the first year, increasing at an annual rate of $500 thereafter. The firm's MARR is 12%. Which option would you recommend?
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.
Eight years ago, a firm purchased a lathe for $45,000. The operating expenses for the lathe are $8,700 per year. An equipment vendor offers the firm a new machine for $53,500 with operating costs of $5,700 per year. An allowance of $8,500 would be made for the old machine on the purchase of the new one. The old machine was expected to be scrapped at the end of five years. The new machine's economic service life is five years with a salvage value of $12,000. The new machine's O&M cost is estimated to be $4,200 for the first year, increasing at an annual rate of $500 thereafter. The firm's MARR is 12%. Which option would you recommend?
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