Question

Salalah Mills Ltd. purchases machinery which costs RO 20,000. The useful life of the
machine is 9 years and the annual rate of depreciation is 6% per annum, depreciation being
calculated on WDV method. After 9 years, the existing machine has to be replaced by a new
one which will cost 250% more than the book value of the existing machine at that time.
a) If company sells existing machine at scrap value, What is the extra amount the company
will require at the end of 9th year to replace the existing machine by a new one?
b) Do you agree with company’s decision to sell the existing machine after 9 years and buy
new one. Give reasons to your answer

Answer 1

Answer:- Given Data:- machine cost: R$ 20,000 weful life : 9 years Rute of depreciation: 6% solution: a) Rute of Deprecation under wov method Rate of Depreciation z 1-n Salvage value cost we have to find the extra amount to buy new machine? entra amount to brey new machine Lost Scrap or salvage value new machine the problem * The new machine cost 95 o indirectly given in New machine cost = 250x 20,000 = Rs.50,000 100

* To find the scrap value: Rute of deprecation Deel 1-nj salvage or serap cast = (-1) (sguaring on botu side) Sz R²xC (1-62 0.0036% 20,000 72 64 82 5 = 0.062 x 20000 (1-9)2 S = Rs. 1125 extra dat two amount to buy a =50,000 1.125 new machine =4998.875

Jow. a new b). I am agree with company's decision to sell the excesting machine after a yecer to buy new one. But the scrap value of the machine as very so. The campusy can directly. buy machine That is best way. But there is a problem. The storage space for the machine (old) is needed that is an another expense. Because of all reasons. The best way is sell the existi- ng machine after a year to. bay bewobei
the company decision is best one : the scrap value after 9years is very small amount (rs 1.125)

If not sell the old machine need more space for store the old machine