Saturday, November 14, 2020

Important Formula : Annual Depreciation Charges

 

The annual depreciation charges are calculated by following methods.

( 1 ) Straight line method

Annual depreciation charge = P – S / n

Where P = Initial cost of equipment / plant

           S = Salvage / Scrap value of equipment / plant

           n = Life of equipment

( 2 ) Diminishing value method

Value of equipment after one year

                       S = P ( 1 – x )

Value of equipment after 10th year

                     S = P ( 1 – x )10

Value of equipment of n years

                    S = P ( 1 – x )n

Annual depreciation

                   x = 1 – ( S / P )n

Where

        P = Initial cost of equipment / plant

       S = Salvage / Scrap value of equipment / plant

       n = Life of equipment

       r = Annual rate of interest

       x = Annual depreciation

( 3 ) Sinking Fund method

Annual depreciation in the sinking fund method

       q = ( P – S ) [ r / ( 1 + r )n – 1 ]

Where

      P = Initial cost of equipment / plant

      S = Salvage / Scrap value of equipment / plant

     n = Life of equipment

     r = Annual rate of interest

     x = Annual depreciation

Cost of equipment after n year

                     = P – S

                    = q [ ( 1 + r )n – 1 / r ]

Sinking fund factor = r / { ( 1 + r )n – 1 }

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