old factory equipment was purchased four years ago for $925,000. Over the last four years, your company has allocated depreciation based on the straight-line method. The expected salvage value is $35,000. The current book value of the factory equipment is $620,000. The operating expenses total approximately $40,000 a year. It is estimated that the residual value (market value) of the old machine is $355,000. The CFO is contemplating whether to replace the piece of factory equipment. The replacement factory equipment would have a purchase price of $520,000, a useful life of eight years, a salvage value of 45,000, and annual operating costs of $35,000.
old factory equipment was purchased four years ago for $925,000. Over the last four years, your company has allocated depreciation based on the straight-line method. The expected salvage value is $35,000. The current book value of the factory equipment is $620,000. The operating expenses total approximately $40,000 a year. It is estimated that the residual value (market value) of the old machine is $355,000. The CFO is contemplating whether to replace the piece of factory equipment. The replacement factory equipment would have a purchase price of $520,000, a useful life of eight years, a salvage value of 45,000, and annual operating costs of $35,000.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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.
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Replace or Keep Equipment?
The old factory equipment was purchased four years ago for $925,000. Over the last four years, your company has allocated depreciation based on the straight-line method. The expected salvage value is $35,000. The current book value of the factory equipment is $620,000. The operating expenses total approximately $40,000 a year. It is estimated that the residual value (market value) of the old machine is $355,000. The CFO is contemplating whether to replace the piece of factory equipment. The replacement factory equipment would have a purchase price of $520,000, a useful life of eight years, a salvage value of 45,000, and annual operating costs of $35,000.
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