How to calculate Depreciation in real terms? Question ! After extensive medical-

Question

How to calculate Depreciation in real terms?

Question ! After extensive medical-and marketing-research, Pill plc believes it can penetrate the pain-reliever market.-It-is considering-two-alternative products. The first is a medication for headache pain. The second is a pill for headache and arthritis pain. Both products would be introduced at a price off4 per package inreal terms. The headache-only medication is projected-to sell 5 million packages a year, whereas the headache and arthritis remedy would-sell-10 million packages a year Cash costs-of production-in the first-year are expected-to-be £1.50 per package in real terms for the headache-only brand. Production-costs-are expected-to-be £1.70-in realterms for the headache and arthritis pill. All prices and-costs are expected-to rise at the general-inflation rate of-5 per-cent. Either product-requires further investment.The-headache-only pill could be produced using equipment costing £10.2 million. That equipment would last 3 years and have noresale value. The machinery required to produce the broaderremedy wouldcost £12 million and last 3 years. The firm expects that equipment to have a £1 million resale value (in-real terms)-at the end-of year-3.-Pill plc uses reducing balance (20 per cent)-depreciation..The firm faces a corporate tax rate of 24-per cent and believes that-the-appropriate real-discount-rate-is-13-percent..

Explanation / Answer

Deprecation in real terms can be calculated by calculating the present worth of the nominal value of depreciation. However, the method used gives the same result when you calculated the present worth of each items and add up.

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