Question

If an asset book-depreciates by the DDB method over an 8-year period, how long will it take to reach its salvage value if the estimated salvage is 25% of the first cost? (10 points)

Answer 1

Solution:

Depreciation is a method to represent the reduction in value of the asset. This is a way that is just represented in books i.e. there is no actual cash flow happening with respect to depreciation that is shown in the book. There are several different methods to calculate depreciation for the same asset.

In double declining balance depreciation, the asset loses its value faster in early years and slower in later years. The depreciation charged is different every year. The depreciation amount in DDB depreciation is

D= a(1-a)n-1B

Here,

  $\alpha$ is depreciation rate which is 2 / n

n is number of years

B is initial investment on the asset

Here ,

Byt = 0.25.1

B is x, n is 8 years,

To find t

So, $\alpha$ is 2 / n i.e 2 / 8 = 0.25

The book value for year t will be:

BV = B(1-a)

0.25.r = (1 – 0.25)

  

0.75% = 0.25

t = logo.750.25

= 4.8 years

The number of year it will take to reach its salvage value is 4.8 years