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Ahmad Masood Faqiri says

Dear John Sir,

You have said that if he cast the depreciation, I am a little confused that how you took 80,000 did you just assumed it or the examiner would tell us what value to use , If you give some explanation on this it would be very nice of you .

Thank You I am getting F9 lectures very easily and I can understand them all credit goes to you .

Thanks

John Moffat says

The total depreciation is the difference between the initial cost and the scrap value (both of which are given in the question – I assume that you have downloaded the Course Notes?).

fahad says

Sir , today i was doing ARR questions in a class , and i have deducted the scrap value from the cost of machine but my lecturer told me its a wrong method , but i was doing this every time when i have scrap value in a question , i m confused , i don’t know what to do , help me sir please ..

John Moffat says

For ARR you need the average investment in the Statement of financial position (balance sheet). This is (initial investment + scrap value) /2.

Think about this. Suppose you bought a machine with a cost of 100,000 and a scrap value of zero. The value in the SOFP would fall each year (because of depreciation) and the average value would be 50,000.

Now suppose you bought the same machine with the same cost, but with a scrap value of 20,000. The value in the SOFP would again fall each year, but only down to 20,000.

Surely, the average value in the second case would be higher than in the first case?

The average value in the second case would be (100,000 + 20,000) / 2 = 60,000.

I hope that makes sense.

You might find the free lectures on investment appraisal useful

(and I am surprised that your lecturer did not explain to you the reason for adding the scrap value!!)

fahad says

No Sir , i m talking about deducting the scrap value from the cost of machine when you are working out total depreciation , like e.g total cashflows less total depreciation (cost – scrap value) and my lecturer didn’t deduct the scrap value from the cost of machine , the average investment part i already understood by your lectures thanks..

John Moffat says

Sorry for misunderstanding your question.

The total depreciation over the life of the machine will certainly be the initial cost less any scrap value.

I cannot think of a situation that would result in your lecturer telling you different. It seems very strange!

(He was definitely talking about ARR calculations, and not discounted cash flow calculations?)

fahad says

Thanks a lot Sir , i owe you , i have been passing all the ACCA papers of which you taught us because the way you teach is more effective , I do really enjoy your lectures and thank you for your very interesting lectures , I appreciate everything and I’ve learned a lot’ ..

John Moffat says

You are very welcome, and thanks a lot for your comments