1.1. Book Value Calculation for First Year

So, depreciation for the first year is nothing but 0.4 into book value. D = 0.4 × 28,00,000 = 11,20,000 rupees

In this chunk, we calculate the depreciation for the first year of a machine using a specific rate applied to its initial book value, which is the purchase price. The formula is simple: multiply the initial book value of the machine by the depreciation rate, which is 0.4 in this case. Thus, if the machine's initial value is 28,00,000 rupees, the depreciation for the first year is calculated as 0.4 × 28,00,000 = 11,20,000 rupees.

Imagine you bought a new car for 28 lakh rupees, and the dealer told you that the car will depreciate at a rate of 40% each year. This means that after the first year, your car’s value decreases significantly, just like how we calculated that 11,20,000 rupees is lost in value for the machine.

So, now you calculate the book value at the end of the first year. That is nothing but your purchase price of the machine 28 lakh minus the depreciation for the first year. That gives you the book value at the end of the first year as 16,80,000.

After determining the depreciation for the first year, we can calculate the book value at the end of the first year. The book value is essentially the original cost of the asset minus the amount it has depreciated. In this case, the initial cost is 28 lakh rupees, and we subtract the depreciation (11,20,000 rupees) to get the book value of 16,80,000 rupees at the end of the first year.

Think of it like a smartphone you bought for 28,00,000 rupees, which loses some value every year. If it loses 11,20,000 rupees in value after a year, its worth is now 16,80,000 rupees. This is how depreciation works to affect its value.

So, for the second year, the depreciation is nothing but D2 is 0.4 into book value at the end of first year, D = 0.4 × 16,80,000 = 6,72,000 rupees.

Similar to the first year, we calculate the depreciation for the second year using the book value at the end of the first year. Applying the same depreciation rate of 40% to the updated book value of 16,80,000 rupees gives us a depreciation amount of 6,72,000 rupees for the second year.

If we go back to our car example, just like your car's value would continue to decrease every year, after the first year, you would determine how much less it's worth and then calculate how much more it will lose in value in the second year, which in our case, is a loss of 6,72,000 rupees.

Now calculate the book value at the end of the second year, it is nothing but book value at the end of the first year minus the depreciation for the second year: 16,80,000 minus 6,72,000 gives us the book value at the end of second year as 10,08,000.

To find the book value at the end of the second year, we take the book value at the end of the first year and subtract the second year's depreciation. The resulting value reflects the new worth of the machine after two years of depreciation: 16,80,000 minus 6,72,000 results in a book value of 10,08,000 rupees for the end of the second year.

If your smartphone is now worth 16,80,000 rupees after one year, you apply the same principle and realize after the second year, its worth drops further to 10,08,000 rupees. This continuous calculation shows how assets depreciate over time.

Annual cost for the first year is 12 lakh and your depreciation for the first year is 11,20,000, so annual cost will be: Annual cost of first year = 11,20,000 + 12,00,000 = 23,20,000 rupees.

In this section, we combine both the operating costs and the depreciation to determine the annual cost for the machine. The total annual cost for the first year is calculated by adding the depreciation amount (11,20,000 rupees) to the operating and maintenance costs (12,00,000 rupees), resulting in a total of 23,20,000 rupees.

Using the car analogy once again, consider how much you'll spend on maintaining the car plus the loss in value (depreciation). For instance, if you don't just consider how much the car loses value but also the yearly service costs, you find out total expenses for the year.

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