Sohar steel LLC is planning to purchase a building for OR.800,000. Acquisition cost of building includes OR.90,000 for land area and company will incur a renovation cost of OR.70,000. The estimated annual cost of the building includes Repairs and maintenance is OR.25,000, Property tax is OR.16,000, Insurance 5%. Annual Depreciation is based on estimated economic life of 20 years with no salvage value. The cost of capital for the company is 10%. Alternatively, company can lease the building with an annual rent of OR.80,000 and incur cost of property taxes, insurance, and necessary repairs. You are required to calculate the total annual cost, if Sohar company purchase the asset. a. RO.210,500 b. RO.184,500 c. RO.222,500 d. None of the options

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Depreciation Methods

The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.

Depreciation Accounting

In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.