Suppose a business is considering the purchase of a $40,000 machine whose operation will result in increased sales of $30,000 per year and increased operating costs of $10,000; additional profits will be taxed at a rate of 50%. Depreciation is assumed to be taken on a straight-line basis over four years with no expected salvage value. What will happen to this project's real rate of return if inflation during the next four years is expected to be 10% compounded annually?
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.
Suppose a business is considering the purchase of a $40,000 machine whose operation will result in increased sales of $30,000 per year and increased operating costs of $10,000; additional profits will be taxed at a rate of 50%.
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