18. Depreciation Calculation
The chapter discusses the depreciation of machinery, methods for calculating average annual cumulative costs, and guidelines for determining the economic life of a machine. It introduces multiple approaches for equipment replacement decisions, focusing on minimizing costs and maximizing profits. Various methods of analysis, including the intuitive, minimum cost, maximum profit, and payback period methods, are examined in relation to machine replacement strategies.
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What we have learnt
- Depreciation is important for calculating book value and costs associated with machinery.
- Annual costs can be calculated by combining operating, maintenance, and depreciation costs.
- Different replacement analysis methods provide varying insights into economic life and profitability.
Key Concepts
- -- Depreciation
- The reduction in value of an asset over time, calculated based on its book value.
- -- Annual Cost
- The total costs associated with owning and operating equipment for a given period.
- -- Economic Life
- The period during which an asset is expected to generate income or is useful for business operations.
- -- Replacement Analysis
- A method of evaluating whether to replace an existing asset with a new one based on cost and profitability criteria.
- -- Payback Period
- The time period required for an investment to generate an amount of income equal to the cost of the investment.
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