Depreciation

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• #42665

curious george
Participant

In my current project I have obtained capital (used equipment) from sister plants. It is an internal expenditure. However, I do not feel we should pay according to asset value. The depreciation of the equipment should be the deciding factor? How do I determine we will pay according to the present value of the equipment? I feel the quoted prices are inflated to simply add to their quarterly numbers.

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#134865

Dartman_undersiege
Participant

CG,
There are three general type for calculation of equipment depreciation and your finance department should know about this. Formulae might vary according to different company issue and policy.
1.0 Straight Line Depreciation (SLD)
SLD

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#134867

Dartman_Under siege
Participant

CG,
My apology from my previous post. Button are accidentally pushed.
As I was saying, there are three (3) general type of formulae use in calculating depreciation of equipment. But this varies according to companies. You might wanted to check with your finace department for the detailed calculation use in your company. But if you don’t have anything to begin with you could use below. Thus,
1.0 Straight Line Depreciation (SLD)
SLD = (C-R) / L     ; unit are in \$ per year
2.0 Reducing Balance Depreciation (RBD)
RBD = 1 – (R/C) ^ (1/N)    ; unit are in %
3.0 Depreciation per unit of Production (DUP)
DUP = (C – R) / Unit planed  to produce or run   ; units are in \$ per unit

Where:
C = Cost of Asset ,    R = Residual Value   ,   N = Useful life
Number (3) might be the one appropriate for your requirement.
Ex.) IF your machine are expected to produce 150,000  units before the end of useful life of 5 year with C = \$14000 and R = \$1000
Then,
= (14000 – 1000) / 150,000 = \$ 0.08666 per unit
therefore : if on the fist year (or months) you able to produce 32,490 units;
First year depreciation = 32,490 (0.08666)  = \$ 2,816
Hope this provide something useful.
Dartman_undersiege

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#135266

Mara D. Burns
Participant

In general, depreciation can be applied as if for tax purposes, in which case you would want to look at the IRS depreciation tables, or talk to your finance department.  Alternatively, you could use the ‘replacement cost’ depreciation used by insurance companies. You would first determine the cost to purchase an item new ( in today’s dollars).  Since you are talking about hardware, you would then need to determine the life expectancy of the item, as well as how many years in that life expectancy have already elapsed, and compute its current value.  For example, if a piece of equipment would cost \$200 to purchase new today, with  a life expectancy of 10 years, and it is now 3 years  old, its current value is  70% of the replacement cost.  If you use the ‘actual cash value’ depreciation, the same formula would apply, however, you would use the original cost of the item, not its replacement cost. I hope this helps.

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