How to evaluate depreciation and interest costs of cos

Depreciation: Overtime, assets lose their productive capacity due to reasons such as wear and tear, obsolescence, amongst others. As a result, their values deplete. Companies need to account for this depletion in value. This amount is called depreciation expense. Depreciation can also be viewed as matching the use of an asset to the income that it helped the company generate. It may be noted that it only represents the deterioration in value. As such, this expense is not a direct cash expense. There is no outflow of cash.

Depreciation is commonly accounted in two ways straight line and written down value. The straight line method divides the cost of an asset equally over its lifetime. An example will help us understand the process better. Suppose a company buys equipment worth Rs 10 m in FY11. This equipment is expects to have a lifeline of a decade (10 years). As such, the depreciation rate would be 10% i.e. Rs 1 m (Rs 10 m * 10%). Therefore, the company will show depreciation charge (for that asset) as Rs 1 m each year.

Year	Value of asset (Rs m)	Depreciation Amt (Rs m)
FY11	10,000,000	1,000,000
FY12	9,000,000	1,000,000
FY13	8,000,000	1,000,000
FY14	7,000,000	1,000,000
FY15	6,000,000	1,000,000
FY16	5,000,000	1,000,000
FY17	4,000,000	1,000,000
FY18	3,000,000	1,000,000
FY19	2,000,000	1,000,000
FY20	1,000,000	1,000,000
FY21	0	-

 

 

 

 

 

 

 

 

 

 

 

Under the written down value (WDV) method, companies depreciate the value of assets using a fixed percentage on the written down value. The written down value is the original cost less the depreciation value till the end of the previous year. As such, this results in higher depreciation during the earlier life of the asset and lesser depreciation in the later years. An example of the same is shown below:

A company buys