The depreciation cost of a paper napkin machine refers to the systematic allocation of the machine’s cost over a certain period. The following components are considered when calculating the depreciation cost:
- Initial Cost
- The purchase price of the paper napkin machine. For example, 100,000 USD.
- Salvage Value
- The expected value at the end of the machine’s economic life. For example, 10,000 USD.
- Depreciation Period
- The economic life of the machine. Typically accepted as between 5 and 10 years. For example, 10 years.
Depreciation Calculation Method
To calculate depreciation, follow these steps:
- Calculate the Total Depreciable Amount:
- Initial Cost – Salvage Value
- Example: 100,000 USD – 10,000 USD = 90,000 USD
- Calculate the Annual Depreciation Amount:
- Total Depreciable Amount / Depreciation Period
- Example: 90,000 USD / 10 years = 9,000 USD
With this calculation, 9,000 USD in depreciation will be allocated each year. This helps the business manage costs and better understand the value loss over the machine’s economic life. The depreciation amount is a critical factor in financial planning, and this annual figure affects the financial statements.
