The current value of an asset is used as the base to determine the depreciation expense for the year. After calculating the depreciation expenses, the book value of the asset for the next year is calculated by subtracting the depreciation expense from the base value and the new book value is used as the base to find the depreciation expense for the next year. This process is repeated each succeeding year until the book value of the asset in zero. Thus it is important to determine the current value of the asset to calculate the deprecication expenses throughout the useful life of the asset. Any difficully in determining the current value of an asset will lead to incorrect calculation of depreciation expense thus resulting in incorrect cash flows for the firm.
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