- The formula used to calculate the reducing balance depreciation is
BVt= C ((1)-(rate/100)) ^n
Note – n represents the number of years.
Thus now I can use the present book value to calculate the rate at which the machine has depreciated.
I will substitute the current book value in place of BVt in the equation. Then substitute C with the cost of the machine and substitute 2 in place of n as the current book value provided by the accountant is as of 2 years. I can then solve the equation in order to find the rate in a Graphic Display Calculator (GDC).
After I have the rate I can now forecast the depreciation for the machinery. So to have more accurate and less uncertain data I will calculate and create a depreciation schedule from 2 methods.
- The first method is the flat rate depreciation method by which the machinery depreciates by a constant amount per annum.
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The second method I will use is of the reducing balance depreciation which can be calculated through the formula BVt = C ((1)-(rate/100)) ^n.
After I have the forecasted the depreciation for the machinery through the depreciation schedules I will calculate loan repayment for the machinery as the company had taken a loan to buy the machinery. I have the amount of loan taken by the company and also have the interest rate and the payback period from the data provided by the accountant. Thus I will track this loan and find the monthly repayment required for the company to repay the loan with interest in the payback period limit set by the bank.
- Data collection/analysis:
The company bought two machines in 2007 the individual total cost of the machines are:
- Machine 1- 2611440 /- INR
- Machine 2- 2527200 /- INR
The accountant gave the book values of both the machines after the machines had depreciated for 2 years.
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Machine 1- BV2 = 1935465 /- INR
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Machine 2- BV2 = 1873031 /- INR
So now I can find the rate of depreciation through the formula of reducing balance depreciation.
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BVt = C ((1)-(rate/100) ^n
For machine 1:
1935465 = 2611440 ((1)-(rate/100)) ^2
∴ 1935465/2611440 = ((1)-(rate/100)) ^2
∴ Using GDC - rate = 13.91 %
For machine 2:
1873031 = 2527200 ((1)-(rate/100)) ^2
∴1873031/2527200 = ((1)-(rate/100)) ^2
∴ Using GDC – rate = 13.91 %
After we have calculated the depreciation rate for both the machines which is 13.91 % we can now forecast the future depreciation for the machinery through depreciation schedules.
- Method 1 – Flat rate depreciation
As it is flat rate depreciation the rate we found out through reducing balance method cannot be used. We can find the amount which has depreciated from the original cost for the machines and then divide it by 2 as we have the data for 2 years and thus we will find out at with what constant amount is the machine depreciating.
= 2611440-1935645 = total depreciated amount
∴total depreciated amount = 675795 INR
∴depreciation per year = 675795/2
∴depreciation per year = 337897.5 INR
= 2527200-1873031 = total depreciated amount
∴total depreciated amount = 654169 INR
∴depreciation per year = 654169 /2
∴depreciation per year = 327084.5 INR
Now for flat rate depreciation we have the constant amount depreciating for both the machines, thus now through a depreciation schedule we can forecast the Book values for 5 future years.
