Question

valuate each given using the indicated method and show complete computations. 1. A P110,000 chemical plant had an estimated life of 6 years and a projected scrap value of P10,000. After 3 years of operation, an explosion made it a total loss. How much money would have to be raised to put up a new plant costing P150,000, if depreciation reserve was maintained during its 3 years operation by (a) straight line method and (b) declining balance method. Money is worth 6%.

Answer 1

1) Straight line method
We are given: Co = P110,000; Cn = P10,000; n= 6 years; m= 3 years
Depreciation per year as per straight line method: (110,000 - 10,000) / 6 = 16,666.667
Depreciation for 3 years = 16,666.667 * 3 = 50,000
Amount required for the replacement = P150,000 - P50,000 = P100,000
FV after 3 years when money is worth 6% = 100,000 (1+6/100)^3 = 119,102

2) Declining balance method:
Depreciation for 3 years = $36,667 + $24,444 + $16,296 = $77,407
Amount required for the replacement = P150,000 - P77,407 = P72,493
FV after 3 years when money is worth 6% = 72,493 (1+6/100)^3 = 86,340