Question

A pump has an installed cost of Rs. 40,000 and a 10-year estimated life. The salvage value of the pump is zero at the end of 10 years. The pump value (in rupees) after depreciation by the double declining balance method, at the end of 6 years is:

• A. 4295
• B. 10486
• C. 21257
• D. 37600

Hint:

In the double declining balance method, apply the depreciation rate to the remaining book value each year. It leads to faster depreciation in the initial years.

Answer 1

The Correct Option is B

Given:
Initial cost (P) = Rs. 40,000
Estimated life = 10 years
Salvage value = Rs. 0
Depreciation method = Double Declining Balance (DDB)
Step 1: Calculate the straight-line depreciation rate
Straight-line rate = $\dfrac{100%}{10} = 10%$
Double declining rate = $2 \times 10% = 20%$
Step 2: Apply the DDB depreciation for each year
$V_0 = 40000$
$V_1 = 40000 \times (1 - 0.20) = 32000$
$V_2 = 32000 \times (1 - 0.20) = 25600$
$V_3 = 25600 \times (1 - 0.20) = 20480$
$V_4 = 20480 \times (1 - 0.20) = 16384$
$V_5 = 16384 \times (1 - 0.20) = 13107.2$
$V_6 = 13107.2 \times (1 - 0.20) = 10485.76 \approx 10486$
Thus, the pump value at the end of 6 years is Rs. 10486.