# help with “relevant cost of an asset” please

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• neilsolaris
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I’m struggling to understand the concept of working out the relevant cost of an asset. My BPP book simply shows a “higher of, lower of” diagram, without explaining how it works. I’ll give the question I’m stuck on.

A machine cost \$14,000 ten years ago. It is expected that the machine will generate future revenues of \$10,000. Alternatively, the machine could be scrapped for \$8,000. An equivalent machine in the same condition would cost \$9,000 to buy now. What is the deprival value of the machine?

I understand that the \$14,000 is a sunk cost, and is irrelevant. Therefore, if the machine was kept, would the cost be – \$10,000 + \$8,000 = – \$2000? However, in that case, would it not be possible to still sell it as scrap afterwards?

The alternative would be to buy a new one. In that case, am I right in saying the cost would be \$9,000 – \$8,000 = \$1,000?

The answer given in my book says “the deprival value of the machine is the lower of the replacement cost and £10,000. The deprival value is therefore \$9,000. I’m afraid I can’t draw the diagram here, but it is on page 351 of the BPP book if you have it.

I would be very grateful if someone could explain how this works please, and also how the diagram works.

Thanks a lot.

neilsolaris
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I meant to post this in the F2 forum, but feel free to reply if you can help me!

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