5. Private Planes Ltd is a private hire plane 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 “Occasional” and the “Luxury copter”

The “Occasional” is kept as a standby machine i.e. will only be used if there is a problem with the “Luxury”. If the company did not have this machine, it is estimated that average annual cash outlay on rental of £68,000 would have to be spent on hiring another machine. The annual expenditure on keeping the “Occasional” maintained properly is £40,000. The standby facility will be required for the foreseeable future.

The “Luxury” has a flying life of 10 years at the end of which its net realisable value would be £2,400,000. Its net annual contribution to the cashflow over the ten years is expected to be £960,000.

 Private Planes Ltd expects to earn 10% on capital invested.

Required:

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

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