XL Co. owns a machine purchased a machine 4 years ago for OMR 80,000. The accumulated depreciation on the machine to date is OMR 32,000. Depreciation rate is 10% per annum straight line method. XL Co. can sell the machine to another manufacturer for OMR 50,000. In order to make the sale, XL Co. must incur a transportation cost of OMR 2000. If XL Co. replaces the machine with a new version, it would cost OMR120,000. The cash flows from existing machine are estimated to be OMR 25,000 for the first two years and OMR 20,000 for the remaining 4 years of the machine’s life. The discount rate at 10 % is: - Year -1 0.909, Year -2 0.826, Years- 3 to 6 inclusive 2.619 (annuity rate) Calculate the value of machine under the four methods identified in the four possible measurement bases with clear steps and calculations .
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.
XL Co. owns a machine purchased a machine 4 years ago for OMR 80,000. The
XL Co. can sell the machine to another manufacturer for OMR 50,000. In order to make the sale, XL Co. must incur a transportation cost of OMR 2000.
If XL Co. replaces the machine with a new version, it would cost OMR120,000.
The cash flows from existing machine are estimated to be OMR 25,000 for the first two years and OMR 20,000 for the remaining 4 years of the machine’s life.
The discount rate at 10 % is: -
Year -1 0.909, Year -2 0.826, Years- 3 to 6 inclusive 2.619 (annuity rate)
Calculate the value of machine under the four methods identified in the four possible measurement bases with clear steps and calculations .
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