5.2. Minimum Cost Method Overview

Try these first

1. 1.

   What is depreciation?

   Hint

   Think about how an asset's value decreases over time.

2. 2.

   How do you calculate the book value after one year?

   Hint

   Use the initial value and subtract the determined depreciation.

3. 3.

   What is the primary purpose of the minimum cost method?

   • To calculate depreciation only
   • To determine replacement timing based on cost
   • To evaluate total revenue

   Hint

   Think about the method's goal.

4. 4.

   True or False: Dr. James Douglas's guidelines suggest that machinery should be replaced when the estimated annual cost of the current machine is lower than the proposed machine's costs.

   • True
   • False

   Hint

   Consider when replacement should happen.

5. 5.

   A machine has an initial cost of 5 million rupees, with 30% depreciation yearly. Calculate the depreciation and book value after two years, then find the cumulative cost if operating costs are 1.5 million each year.

   Hint

   Follow the depreciation and cost formulas step by step.

6. 6.

   If a proposed replacement's average annual cumulative cost is 2 million rupees, and your current machine's estimated annual cost is 2.5 million, describe the decision to replace.

   Hint

   Compare current and proposed costs.