Depreciation and replacement cost
Abstract
The sharp rise in prices in recent years has stirred up a
brisk clebate on the meaning and measurement of business
income. In computing income, costs of labour
and material are generally reflected in current prices, but
the provision made for depreciation is generally not sufficient
to replace fixed assets.
This paper investigates various approaches to the oroblem
of providing sufficient depreciation allowance in
measuring income. The relationship between written down
value and the straight line inflation adjusted method of
providing depreciation has been examined. Simulation
technique has been used to illustrate the problem and
pertinent policy implications of the use of various depreciation
methods have been highlighted.
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