2.1. Replacement Justification Based on Economic Life

Try these first

1. 1.

   What is depreciation?

   Hint

   Think about how assets lose value as they are used.

2. 2.

   How do you calculate annual cost?

   Hint

   Remember, total cost includes all expenses for the year.

3. 3.

   What is the primary purpose of calculating depreciation?

   • To determine legal value
   • To track value loss over time
   • To predict future earnings

   Hint

   Consider the function of depreciation in financial terms.

4. 4.

   True or False: The book value decreases annually.

   • True
   • False

   Hint

   Think about how wear affects market value.

5. 5.

   A company uses a loader that costs 2.5 million rupees initially. After 7 years, its annual operating cost rises to 1 million rupees with a depreciation at 30%. Calculate its current book value and whether it should be replaced.

   Hint

   Remember to figure the cumulative operating cost before making a decision.

6. 6.

   If you find that replacing an old machine increases productivity significantly, yet the new machine's costs are higher annually than the cumulative cost of the old, how does your decision change?

   Hint

   Consider long-term gain versus short-term savings.