What Are Legacy Costs?

The average annual cost method treats the continued use of old equipment and the purchase of new equipment as two mutually exclusive solutions, and assumes that when the equipment is replaced in the future, it can find a replaceable equipment at the original average annual cost.

Average annual cost method

The problem solved by this method is mainly that it cannot be calculated completely

There are three methods to calculate the average annual cost of a fixed asset that considers time value:

(1) Calculate the total present value of cash outflows and allocate it to each year.

(2) Since there are already equal operating costs in each year, as long as the original investment and residual value are amortized to each year and then summed up, the average annual cash outflow can also be obtained.

(3) Residual value × minimum rate of return is deemed to bear the corresponding interest each year, and then amortized with the net investment (original investment-residual value) and the total annual operating cost to obtain the average annual cost.