1 The University of Birmingham The Birmingham Business School Department of Accounting and Finance Accounting Theory 07 12 !

" Basic #ssues in Depreciation

$o%

#ssues

Some fixed assets are depreciated but others are not. Why?

Why can fixed assets not go on for ever and ever?

How should the useful life of a depreciating asset be determined?

Which depreciation method should be used and why?

2 Determination of useful life ! company has bought a new machine with the following estimated outlays and receipts" &ear 2 +

'ash (udget

0 + $%%%

1 +

) +

* +

#utlay &epairs &esidual value

1$%%% 2$ %%

1$2%% 2$1%%

1$ %% 1$ %%

1$'%% '%%

!part from the initial outlay all cash flows occur at the end of the year. (he company)s cost of capital is * per cent per annum. ,e-uired. +etermine the machine)s optimum life.