Shouldn’t the
Incremental Base for depreciation = cost of new mach-book value of old mach?
ArshjotAdvanced
Capital budgeting
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The formula you provided is not the correct calculation for the incremental base for depreciation. The correct formula for calculating the incremental base for depreciation is:
Incremental Base for Depreciation = Cost of New Asset – Salvage Value of Old Asset
The incremental base for depreciation represents the additional amount on which depreciation will be calculated when you replace an old asset with a new one. It takes into account the cost of the new asset and subtracts the salvage value (or residual value) of the old asset.
Here’s an example to illustrate the calculation:
Let’s say you purchase a new machine for $50,000, and you already have an old machine with a book value (or salvage value) of $10,000. The incremental base for depreciation would be:
Incremental Base for Depreciation = $50,000 – $10,000 = $40,000
In this example, the incremental base for depreciation is $40,000. This means that the depreciation expense for the new machine will be calculated based on this incremental base.
But sir, depreciation is always applied on book value rather than salvage value. Also, we have learnt in class that incremental depreciation depicts what is the additional value of depreciation that would be charged as a result of purchasing new machinery in comparison to the one if had been charged to old machinery (since we are calculating new CFAT – CFAT foregone)