You have projected depreciation expense to be $1,000,000 in thenext fiscal year 3 with year-end...
You have projected depreciation expense to be $1,000,000 in thenext fiscal year 3 with year-end accumulated depreciation balances being $5,000,000.
If inflation in medical equipment is averaging 10 percent per year and you wish to finance only 20 percent of your replacement needs with debt, what amount of replacement reserves should you target for year-end (year 3)?
Homework Answers
ANSWER
The expected replacement reserves required at current prices is $ 5,000,000
If inflation is taken into account the reserves that should be available = 5,000,000 * 1.1 = $ 5,500,000
Debt portion of the proposed investment in medical equipment = 5,500,000 * 0.20 = 1,100,000
Therefore required replacement reserves at the year end = 5,500,000 - 1,100,000 = $ 4,400,000
The amount of replacement reserves should you target for year-end (year 3)= $ 4,400,000
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