Plastic Copper Capital investment Useful (class) life $5,000 $10,000 10 years Salvage value for depreciation purposes $1,000(= SV5) $5,000(= SV10) $100 SO 5 years Annual expenses $300 SO Market value at end of useful life
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.
In a chlorine-fluxing installation in a large aluminum company, engineers are
considering the replacement of existing plastic pipe fittings with more expensive, but longer lived, copper fittings. The following table gives a comparison of the capital investments, lives, salvage values, and so on of the two mutually exclusive alternatives under consideration:
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