Scrap value of a machine is one-tenth of its actual cost. If the estimated life of the machine is ten years and the annual depreciation under linear method is Rs. 45000, then the cost of the machine is
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Rs. 5,00,000
Let the cost be C, so the scrap value is \( \frac{C}{10} \). Under the linear (straight line) method:
\( \displaystyle \text{Annual depreciation}=\frac{\text{Cost}-\text{Scrap value}}{\text{Useful life}} \)
\( \displaystyle =\frac{C-\frac{C}{10}}{10} \)
\( \displaystyle =\frac{9C}{100} \)
\( \displaystyle \frac{9C}{100}=45000 \)
\( \displaystyle C=\frac{45000\times 100}{9}=500000 \)
The cost of the machine is Rs. 5,00,000.