Joe is thinking about buying a very good lawn tractor to save the money that he now pays to a lawn service. It will cost $3,000 and Joe expects it to last 10 years, with an average depreciation cost of $300 per year. Joe's wife, who opposes this purchase, feels that Joe will get bored with his tractor in a year. Joe counters by telling her that if he does, he will be able to sell it for about $2,700, which is the purchase price minus first-year depreciation. What do you think about Joe's argument?

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Business

Andreas Tyler

4 June, 09:23

Joe is thinking about buying a very good lawn tractor to save the money that he now pays to a lawn service. It will cost $3,000 and Joe expects it to last 10 years, with an average depreciation cost of $300 per year. Joe's wife, who opposes this purchase, feels that Joe will get bored with his tractor in a year. Joe counters by telling her that if he does, he will be able to sell it for about $2,700, which is the purchase price minus first-year depreciation. What do you think about Joe's argument?

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Cory Bowman · Answer 1

Depreciation refers to the expense matching against revenue caused from such capital project. It does not mean that after deducting the depreciation for a year the asset has the same market value as of the carrying value.

Here, the cost of tractor being capital asset is $3,000

Depreciation is $300

Carrying book value = $2,700

Now, it does not reflect the market value. Therefore, Joe's argument that now he can sell the tractor at a price of $2,700 is not valid. As he might or might not be able to sell the tractor for same.