Q3. Two years ago, a machine was purchased at a cost of $( 2,000,000) to be useful for eight years. Its salvage value at the end of its life is $ 25,000. The annual maintenance cost is $ 25,000. The market value of the present machine is $ 1,200,000. Now, a new machine to cater to the need of the present machine is available at $ 1,500,000 to be useful for six years. Its annual maintenance cost is $ 14,000. The salvage value of the new machine is $ 20,000. Using an interest rate of 12%, find whether it is worth replacing the present machine with the new machine.
Q3. Two years ago, a machine was purchased at a cost of $( 2,000,000) to be useful for eight years. Its salvage value at the end of its life is $ 25,000. The annual maintenance cost is $ 25,000. The market value of the present machine is $ 1,200,000. Now, a new machine to cater to the need of the present machine is available at $ 1,500,000 to be useful for six years. Its annual maintenance cost is $ 14,000. The salvage value of the new machine is $ 20,000. Using an interest rate of 12%, find whether it is worth replacing the present machine with the new machine.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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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Transcribed Image Text:Q3.
Two years ago, a machine was purchased at a cost of $( 2,000,000)
to be useful for eight years. Its salvage value at the end of its life is $ 25,000.
The annual maintenance cost is $ 25,000. The market value of the present
machine is $ 1,200,000. Now, a new machine to cater to the need of the
present machine is available at $ 1,500,000 to be useful for six years. Its
annual maintenance cost is $ 14,000. The salvage value of the new machine
is $ 20,000. Using an interest rate of 12%, find whether it is worth replacing
the present machine with the new machine.
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