Professional Courses
Industry-relevant training in Business, Technology, and Design to help professionals and graduates upskill for real-world careers.
Categories
Interactive Games
Fun, engaging games to boost memory, math fluency, typing speed, and English skills—perfect for learners of all ages.
Typing
Memory
Math
English Adventures
Knowledge
Enroll to start learning
You’ve not yet enrolled in this course. Please enroll for free to listen to audio lessons, classroom podcasts and take practice test.
Interactive Audio Lesson
Listen to a student-teacher conversation explaining the topic in a relatable way.
Understanding Depreciation
Unlock Audio Lesson
Today, we will learn about depreciation, which is a way to allocate the cost of a tangible asset over its useful life. For example, if we have machinery that costs 28 lakh rupees, and we apply a depreciation rate of 40%, how would we calculate the first year's depreciation?
We would multiply the purchase price by the depreciation rate, right?
Exactly! So, 28,00,000 multiplied by 0.4 gives us what amount?
That would be 11,20,000 rupees for the first year.
Correct! Now, what would be the book value at the end of the first year?
It's the initial cost minus the depreciation, so 28 lakh minus 11 lakh 20 thousand.
That would leave us with 16 lakh 80 thousand rupees.
Great work! Always remember, the formula for depreciation is vital to calculating book value each year.
Calculating Annual Costs
Unlock Audio Lesson
Now that we have our book values, let's calculate the annual costs. How would we find this for the first year?
We need to add the depreciation and the operating cost, which for the first year are 12 lakh.
Exactly! So, what would be the annual cost for the first year?
It would be 23 lakh 20 thousand, right? That's 11 lakh 20 thousand for depreciation plus 12 lakh for operating costs.
Right! And for the second year, what needs to change?
We calculate the new depreciation using the book value at the end of the first year, which was 16 lakh 80 thousand.
And then we add the updated operating costs to find the annual cost for the second year.
Correct! Keeping track of these values helps in planning for replacement.
Economic Life and Replacement Decisions
Unlock Audio Lesson
As we calculate annual costs over the years, we eventually determine the economic life of the machine. What does this refer to?
It's the time period where the average cost is minimized and where we may want to consider replacement.
Correct! What factors do we consider when deciding to replace a machine?
We compare the estimated annual costs of the current machine with the minimum average annual cumulative costs of a potential replacement.
Exactly! If our current machine's costs begin to exceed the new one, we should think about replacement. Can anyone recall the economic life for the proposed loader versus the old loader, as mentioned?
For the proposed loader, the economic life is 9 years, and for the old loader, it’s 8 years.
Fantastic! That's very important for making projections and decisions for the future.
Introduction & Overview
Read a summary of the section's main ideas. Choose from Basic, Medium, or Detailed.
Quick Overview
Standard
It details the process of calculating depreciation and book value for machinery over multiple years, using specific examples. The section also discusses how to derive the annual costs by adding operating and maintenance costs to depreciation, and outlines methods for comparing costs for decision-making on equipment replacement.
Detailed
Annual Cost Calculation
In this section, we explore the financial implications of machinery over its lifespan through annual cost calculations. The first step involves determining the depreciation of the machinery which is calculated as a percentage of the book value. For example, with a book value of 28,00,000 rupees and a depreciation rate of 0.4, the first-year depreciation is calculated as:
- Depreciation (D1) = 0.4 × 28,00,000 = 11,20,000 rupees
The book value at the end of the first year is then found by subtracting this depreciation from the initial value, resulting in:
- Book Value at Year 1 = 28,00,000 - 11,20,000 = 16,80,000 rupees
The same procedure is followed for subsequent years, using the book values calculated previously to find depreciation and adjust for annual costs. Annual costs comprise both operating/maintenance expenses and depreciation. For instance:
- Annual Cost Year 1 = 11,20,000 (depreciation) + 12,00,000 (operating) = 23,20,000 rupees.
- Annual Cost Year 2 = 6,72,000 (new depreciation) + 12,60,000 (updated operating) = 19,32,000 rupees.
Cumulative costs and average annual cumulative costs can also be calculated, leading to insights on the economic life of the machine, notably that the economic life of the machine could be around 9 years. The decision to replace equipment is based on whether future annual costs exceed the average cumulative costs of new options. Furthermore, alternative approaches such as the payback period and profit maximization offer different perspectives on when machinery should be replaced.
Audio Book
Dive deep into the subject with an immersive audiobook experience.
Depreciation Calculation for Year One
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
So, depreciation for the first year is nothing but 0.4 into book value. D = 0.4 × 28,00,000 = 11,20,000 rupees.
Detailed Explanation
This chunk describes how to calculate the depreciation for the first year of the machine. The method used is a straightforward multiplication of the book value by the depreciation rate, which is 40% in this case. The book value at the start is given as 28,00,000 rupees. By multiplying 0.4 by 28,00,000, we find that the depreciation for the first year is 11,20,000 rupees.
Examples & Analogies
Think of depreciation like the value you lose on a new car every year. If you buy a car for 28 lakhs and it loses 40% of its value in the first year, it means that by the end of that year, you’ve lost about 11.2 lakhs in value.
Calculating Book Value at Year-End One
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
So, now you calculate the book value at the end of first year, so what is the book value at the beginning of year that is nothing but your purchase price of the machine 28 lakh minus the depreciation for the first year.
Detailed Explanation
To find the book value at the end of the first year, you subtract the calculated depreciation from the initial cost of the machine. Here, the book value at the start of the year is 28,00,000 rupees, and after subtracting the depreciation of 11,20,000, we arrive at a book value of 16,80,000 rupees at the end of the first year.
Examples & Analogies
Using the car analogy again, if your car's initial value was 28 lakhs and it depreciated by 11.2 lakhs in the first year, its value at the end of that year would be 16.8 lakhs. This is like checking how much your car is worth after a year of use.
Depreciation Calculation for Year Two
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
So, for the second year the depreciation is nothing but D2 is 0.4 into book value the end of first year, D = 0.4 × 16,80,000 = 6,72,000 rupees.
Detailed Explanation
In the second year, the depreciation is calculated again using the book value at the end of the first year which is now 16,80,000 rupees. Multiplying this by the depreciation rate of 40% results in 6,72,000 rupees of depreciation for the second year.
Examples & Analogies
Continuing with our car example, if your car is now valued at 16.8 lakhs at the beginning of the second year, then by the end of that year, it may depreciate by 6.72 lakhs, showing that the loss in value continues albeit at a different amount.
Calculating Book Value at Year-End Two
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
Now calculate the book value at the end of second year, it is nothing but book value at the end of the first year minus the depreciation for the second year.
Detailed Explanation
To determine the book value at the end of the second year, subtract the second year's depreciation from the end of the first year's book value. The equation is 16,80,000 minus 6,72,000, which leads to a new book value of 10,80,000 rupees at year-end two.
Examples & Analogies
If your car was worth 16.8 lakhs after the first year and it loses another 6.72 lakhs in value during the second year, its new worth would be 10.8 lakhs at the end of the second year. This shows how depreciation leads to reduced machine value over time.
Annual Cost Calculation
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
Now you can estimate the annual cost by adding the operating and maintenance cost as the depreciation. When you add column 2 and the column 3 you will get the annual costs for every year.
Detailed Explanation
The annual cost calculation involves summing the depreciation and maintenance costs every year. For example, for the first year, you combine the depreciation of 11,20,000 with the operating and maintenance costs of 12,00,000 to find a total annual cost of 23,20,000 rupees.
Examples & Analogies
Imagine you have a monthly budget for your car. You spend on oil changes and maintenance, which is like operating costs, along with accounting for the depreciation loss in value. If you know both your expenses for repairs and how much value you’re losing, you can fully understand the annual cost of owning the car.
Cumulative and Average Annual Cost Calculation
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
Then you can calculate the cumulative cost, then find the average annual cumulative cost.
Detailed Explanation
Cumulative cost is the total cost accumulated over the years, and average annual cumulative cost is calculated by dividing the cumulative cost by the total number of years the machine has been in use. For example, after the first year, the average cost equals the total incurred costs divided by one year, resulting in the annual cost of 23,20,000. After the second year, it's averaged by two, reflecting the trend of cost changes over time.
Examples & Analogies
Think of saving money in a piggy bank; if the piggy bank has 1000 rupees after the first year, your average savings per year is 1000. After the second year, if you have 2000 rupees total, your average savings per year becomes 1000 too. This helps you see how quickly your savings grow over time.
Justifying Replacement Decisions
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
If the estimated annual cost of the current machine for the next year exceeds the minimum average annual cumulative cost of the proposed machine...
Detailed Explanation
This section discusses how to decide when to replace machinery. The guideline suggests that when the estimated annual cost for the current machine surpasses the average annual cumulative cost of a new machine, it's time to consider a replacement. For instance, when the cost of maintaining an older piece of equipment outweighs the benefits compared to a new one, replacement is justified.
Examples & Analogies
Imagine you have an old phone that costs a lot to repair every year, while a new model would cost less in maintenance and offers better features. The decision to upgrade would be based on whether the repair costs exceed what you would spend on a new phone.
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
-
Depreciation Calculation: The method to determine how value decreases over time.
-
Book Value: The amount an asset is worth after depreciation.
-
Annual Costs: All costs associated with operating and maintaining machinery each year.
-
Economic Life: The period in which a machine provides economic benefit.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
-
If a machine is purchased for 28,00,000 rupees with a 40% depreciation rate, the first-year depreciation amounts to 11,20,000 rupees.
-
By incorporating both operating costs and depreciation, if the annual operating cost is 12 lakh, the total annual cost for the first year comes to 23,20,000 rupees.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
🎵 Rhymes Time
-
When machines do depreciate, their value starts to wait, accounting keeps us straight on expenses we calculate.
📖 Fascinating Stories
-
Imagine a car purchased for 1000 coins. Every year it loses 400 coins in value. By the end of the first year, it's worth only 600 coins. This shows how depreciation works in real life.
🧠 Other Memory Gems
-
Remember ADOC: Annual costs = Depreciation + Operating costs.
🎯 Super Acronyms
PEACE
- P: = Purchase price
- E: = Estimate depreciation
- A: = Annual costs
- C: = Cumulative costs
- E: = Economic life.
Flash Cards
Review key concepts with flashcards.
Glossary of Terms
Review the Definitions for terms.
-
Term: Depreciation
Definition:
The reduction in the value of an asset over time, in this case, machinery, calculated as a percentage of its book value.
-
Term: Book Value
Definition:
The value of an asset as reported on the balance sheet, calculated as the original cost minus accumulated depreciation.
-
Term: Annual Costs
Definition:
The total costs associated with owning a piece of machinery each year, including operating, maintenance, and depreciation costs.
-
Term: Economic Life
Definition:
The period over which an asset is expected to remain useful and economically viable for the owner.