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ANNUITY DEPRECIATION!!!

Forums › ACCA Forums › ACCA APM Advanced Performance Management Forums › ANNUITY DEPRECIATION!!!

  • This topic has 4 replies, 4 voices, and was last updated 9 years ago by balmarat.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • September 12, 2010 at 9:15 pm #45239
    jay14
    Member
    • Topics: 29
    • Replies: 63
    • ☆☆

    Pls can someone explain annuity depreciation to me..pref with a qquestion and working or refer to any past question that has it?..thanks..

    September 14, 2010 at 10:59 am #67993
    bkamara65
    Member
    • Topics: 1
    • Replies: 4
    • ☆

    Annuity depreciation is an alternative form of depreciation, it is calculated by finding the equivalent annual cost (EAC) of the initial investment at the company cost of capital.
    The EAC is calculated thus: initial investment/cum.disc factor
    The annual depreciation is computed such that :
    1) Depreciation + imputed interest on capital =EAC, alternatively
    2) EAC – imputed interest charge =depreciation
    Note* the NBV is used each year to compute the interest charge.
    I’ve been looking for past question on this subject,but could not find one.
    However, look at this simple illustration:
    A Company require an invest of $2,100 and is expected to yield a net cash inflow of $320 per annum for five years.non of the initial investment will be recoverable at the end of the project.
    The company cost of capital is 10%,annual accounting profit are to be assumed to equal net inflows less depreciation and tax is to be ignored.

    Solution
    Step 1 – Find the EAC, = 2,100/3.791=$554
    Step 2 -Depreciation = EAC-imputed interest charge
    therefore,
    Yr 1 = ( 10%@2,100)=$210
    so, $554-$210=$334 charge for the year.
    Yr 2 = (10% @2,100-334)=$177
    so, $554-$177 =$377 and so on , try year 3-5, if you’ve problem we’ll chat it out.
    Regard
    Brima Khadri

    September 14, 2010 at 3:44 pm #67994
    jay14
    Member
    • Topics: 29
    • Replies: 63
    • ☆☆

    thanks a lot….will work with this..while we keep looking for a question on it..

    September 15, 2010 at 1:08 am #67995
    Anonymous
    Inactive
    • Topics: 0
    • Replies: 3
    • ☆

    Thanks for explanation

    September 6, 2015 at 3:08 am #270007
    balmarat
    Member
    • Topics: 1
    • Replies: 4
    • ☆

    Little mistake noted, in year one it should become 344

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