Suppose a company has a lift truck but is considering purchasing a new electric lift truck that would cost $1000000 and has operating cost of $19000 in the first year. For the remaining years, operating costs increase each year by 5% over the previous year's operating costs. It loses 17.5% of its value every year from the previous year's salvage value. The lift truck has a maximum life of 5 years. The firm's required rate of return is 5%. Find the economic service life of this new machine.
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 company has a lift truck but is considering purchasing a new electric lift truck that would cost $1000000 and has operating cost of $19000 in the first year. For the remaining years, operating costs increase each year by 5% over the previous year's operating costs. It loses 17.5% of its value every year from the previous year's salvage value. The lift truck has a maximum life of 5 years. The firm's required
Step by step
Solved in 2 steps