5. Easi-copter is a helicopter company which is considering using deprival value for valuing its assets. The company provides you with the following Information on two of its helicopters – the “basic” and the “super”.

The “basic” is kept as a standby machine i.e. will only be used if there is a problem with the “super”. If the company did not have this machine, it is estimated that average annual cash outlay on rental of £8,500 would have to be spent on hiring another machine. The annual expenditure on keeping the “basic” maintained properly is £5,000. The standby facility will be required for the foreseeable future.

The “super” has a flying life of 10 years at the end of which its net realisable value would be £300,000. Its net annual contribution to the cashflow over the ten years is expected to be £120,000.

Easi-copter expects to earn 10% on capital invested.

Required

(a) Define, and critically assess, deprival value.

(b) Calculate the deprival value for both the “basic” and the “super”, giving explanations of why this is so.