Solution to Case Study — Simple 3

1) D 2) C 3) B 4) C 5) C 6) B (RCN less Dep as per CA 2013)=225-80=145

Solution to Case # 1 — Warm up

1. Acquisition cost is INR 50,000

2. Salvage va1ue=Current replacement cost 60,000 x 5/100 Salvage value= INR 3,000
3. Depreciation = (current replacement cost — scrap value) x used life / Total life Scrap
va1ue=current replacement cost x 5 % =60,000 x 5 % =3000
4. Depreciation =60,000-3000 x 2 / 10 =11,400
Depreciated replacement Cost=current replacement cost— Depreciation: 60,000-11,400 =
48,600

Solution to Case # 3 — MMM Lathe

Q1. (D)
Current Cost of MMM Company Model A engine lathe ....... $50,500
Add current cost of taper attachment.................................... $1,500
Add installation labor ............................................................. $3,200
Add freight. ..................................................................... $1,800
Add sales taxes ......................................................................... $2,800
Cost of loss during trial runs (@2% of cost) ............................$1010
Total Current Cost New. ...................................................... $60,810

Q2 (B)
20 - (2020-2012) = 12 years

Q3 (A)
Salvage Value = 5% X 60,810 = $3040.5

Q4 (D)
Reinstatement CosmRCN=$60,810

Solution to Case # 4 - Index-Induction

1. (80+20% of 80) = Rs 96 lacs (B)

2. Year of purchase is chosen for indexing purpose. RCN=Acquisition cost X (Index in
2018/index in 2012) =96 X 88.4/100.5=84.44 (C)
3. 10% of RCN=10% of 84.44=8.44 lacs (B)
4. 15 yrs-(2018-2014) =11Yrs (A)
5. (96)-96 X 4yrs X (1-5%)/15yrs=71.68 lacs (D)
6. RCN = Rs 84.44 (RCN) -(RCN X 4yrs X (1-10%)/15 Yrs) =64.17 (A)

Solution to Case # 5 - Sales Comparison

1. Market Approach (C)

 2. (D) Instance 4 is the most suitable instance. It has same YoM in comparison with the
subject asset. Further, the sold instance has been given priority over available instance as it
removes the factoring of discount/negotiation
3. (B) Highest priority should be given to same/nearest year of manufacturing. Further, sold
instances should be given priority. Considering the same, the sequel should be 4123.
4. (C) Factors a, b, and d are essential for market approach. Availability of alloy wheels is not
as critical as other points

Solution to case #6 - ABC VMC, Germany (HOMEWORK)

1. (B) Freight on Board (FOB)=Freight Price of USD x Exchange rate in 2015 1 USD = USD
60,000 x 60 = 36,00,000
2. (B) Current Replacement cost = Freight Price x Exchange rate in 2018 1 USD
+Insurance & Freight + Taxes and Duties= 65,000 x 65 + 2,00,000 + 10,00,000
=54,25,000
3. (A) Ratio of current replacement cost to historical freight on board = current replacement
cost / freight on board = 54,25,000 / (USD 60,000 x 60) = 1.51
4. (B) Salvage Value = replacement cost x 5 %= 54,25,000 x 5%= 2,71,250
5. (C) Depreciation = Current Replacement cost — scrap value) x used life / Total life Scrap
value= Replacement cost x 5% = 54,25,000 x 5%= 2,71,250= 54,25,000 — 2,71,250 x 3/15
= 10,30,750
6. (D) Depreciated replacement cost = current replacement cost — Depreciation
= 54,25,000 — 10,30,750 = 43,94,250

Solution to Case #7 - Effective Age

1) (D) 20- (2019-2009) =10 years
2) (C) 6.82 7 Years
3) (C) 18.5 L
4) (A) 20-7=l3 years

SOLUTION workings:
TRENDED
PURCHASE HISTORICAL HISTORICAL
YEAR COST INDEXATION COST
2009 10 1.5 15
2015 3 1.167 3.5
2018 4 1.05 4.2
22.7

The total trended historical cost of 22.7 L includes not only the initial costs but also the costs of
those parts and software that were replaced in 2018. Thus, there is duplication as this was there
already in the original historical cost of 10 L in 2009. To remove this duplication, we have to do
“back-trending” as follows:
[4 X (140/200)] = 2.8 L
Thus, adjusted historical cost as on 2009 is 10 — 2.8 = 7.2 L

ADJUSTED TRENDED
PURCHASE HISTORICAL HISTORICAL
YEAR COST INDEXATION COST
2009 7.2 1.5 10.8
2015 3 1.167 3.5
2018 4 1.05 4.2
18.5

Finally, the calculation of effective age {formula= Total Weighted Investment/total adjusted historical
costs)

TRENDED
PURCHASE HISTORICAL CHRONOLOGICAL WEIGHTED
YEAR COST AGE INVESTMENT
2009 10.8 10 108
2015 3.5 4 14
2018 4.2 1 4.2
18.5 126.2

EFFECTIVE AGE (126.2/18.5) 6.82

(ROUNDED OFF TO 7 years)

Solution to Case #8 - Merger

1- (D) What is the historical cost of P&M? = 250+11+3+5=269
2- (C) What is the premise for valuation? = Existing use, in situ
3- (C) Dep of Plant & Machinery

Age = (31/3/2018)-(1/10/2010) =7.5 years

Depreciation rate = (l-5%)/25=3.8%
RCN=269 X (215/135) =428.4 Cr
Total Depreciation=7.5 X 3.8% X 428.4 = 122 Cr

4- (D) DRC of Plant & Machinery = 428.4-122 = 306.3 Cr

Solution to Sales Comp-Lathe Case #9
1) (b) Market 2) (a) 3) (a) 4) (d) 5) (c) 6) (d) (Market approach does not require any depreciation}

Solution to case # 10 - Non- NESD Robots

1) (D) Useful 1ife=15yrs X 100/100=15
2) (B) Two shifts working: Useful 1ife=15yrs X 100/150=10
3) (C) Three shifts working: \ sefu11ife'15yrs X 100/200-7.5
4) (A) Rs. 8190 (Rate of Dep=(100-5)/10=9.5%)
1st year: 10000 X(1-0.095)=9050
2nd year: 9050 X (1-0.095)=8190
5) (A) Rs. 7627 (Rate of Dep=(100-5)/7.5=12.67%}
1 st year: 10000 X(1-0.1267)=8733
2nd year: 9050 X (1-0.1267)=7627

6) (C) Rs. 7467 (Rate of Dep=12.67%); Dep=10000 X 2 X 12.67%=2533

DRC = 10000 — 2533 = 7467

Solution to Case # 11 - Filter coffee

1. (b) Historical Value of the Filter Press i.e. Acquisition Cost is INR 6,00,000
2. (c) Current Replacement Cost (CRC) = INR 8,00,000
3. (b) Salvage Value = CRC * 5% = 8,00,000 * 5%= INR 40,000
4. (c) Balance Useful Life = 10 Years - 3 Years = 7 years
5. (c) Market Value = CRC — Depreciation — Cost to Cure = CRC - CRC * (1- Salvage) * Age/
Useful Life - Cost to Cure. = 8,00,000 - 8,00,000*(1-5%)*3/10 - 40,000 = 5,32,000
6. (b) Reinstatement Cost i.e. Current Replacement Cost = 8,00,000