Question

A machine shop purchased 10 years ago a milling machine for 600,000 pesos. A working hour...

A machine shop purchased 10 years ago a milling machine for 600,000 pesos. A working hour depreciation reserve had been provided based on a 20-year life of the machine. The owner of the shop desires to replace the old milling machine with a modern unit having many advantages costing 1,000,000 pesos. If the milling machine’s scrap value is 258,000 pesos, what amount is needed to replace the milling machine?

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Answer #1

Assume that no scrap value at the end of 20 years,Cn=0

The depreciation d of a milling machine with an original cost C0 of 600000 pesos 10 years ago having a machine life of 20 years is

d=C0-Cn/n

d=600000/20 = 30000

After 10 years,the depreciation D10 would be

D10=10d=10(30000)

=300000

and the total amount available would be

=300000+258000 = 558000

Therefore the new capital required would be the difference of the cost of the modern unit and the total amount available for the purchase of the milling machine

New capital required = 1000000 - 558000

= 442000 peos

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