4. Depreciation and Book Value

Try these first

1. 1.

   Define investment cost.

   Hint

   Consider what expenses are involved in acquiring a machine.

2. 2.

   What is depreciation?

   Hint

   Think about how an asset's worth diminishes as it ages.

3. 3.

   What does investment cost include?

   • Only the purchase price
   • Purchase price and interest
   • Only interest

   Hint

   Think about both purchasing and financing aspects.

4. 4.

   True or False: Depreciation increases the value of an asset over time.

   • True
   • False

   Hint

   Consider the definition of depreciation.

5. 5.

   A mining company has a machine with an initial cost of $250,000, a salvage value of$30,000 and a useful life of 10 years. Calculate the annual depreciation and the total ownership costs (with 10% investment cost, 3% insurance, 2% property tax, 1.5% storage).

   Hint

   Break it down into parts.

6. 6.

   A machine is purchased for $80,000, with a salvage value of$5,000 and a useful life of 7 years. Calculate the average annual investment and determine total ownership cost, including 9% investment cost, 2% insurance, 2.5% tax, and 1.2% storage.

   Hint

   Use the formulas discussed.