Depreciation and Replacement Cost

Abstract

The sharp rise in prices in recent years has stirred up a brisk debate 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.