Exercise 30: End-of-life costs, disposal of assets, and adjustments

We have looked in detail at how operating costs are modelled throughout the lifetime of a resource. For completeness, and primarily for awareness, we look quickly at what happens when a resource is removed from the network.

Again, please revert to WiMAX-DSL27.

1. Returning to the DSLAM chassis to avoid the confusion of multiple units, set Residual Value = 1000.0 and Decommissioning Cost = 500.0 (icon menu/Costs).

What do you think these inputs mean? What results will be affected? Why does residual value appear immediately after capital cost rather than at the end of the group of fixed asset costs?

2. Look at the precedents of Operating Costs for the DSLAM chassis (which should have been saved in the workspace for WiMAX-DSL27).
3. Why is there no decommissioning cost?
4. Go back to the Editor, increase the run length to 15 years and re-run the model. Now you should have the answer!

Sale of assets

5. Draw the graph Resource Sale of Assets. Here is the residual value.
6. Note the difference in timing between these two events.
7. Which other key result does the residual value change?

If you define a cost trend or age factor for residual value, then STEM will calculate depreciation according to the expected end-of-life residual value. A correction may be necessary in the case of early disposal if the resource becomes redundant. This may mean a jump in depreciation if the actual residual value is lower than expected; or it can require a ‘refund’ if the resource is sold for more than the written-down value at the end of the previous period. This latter effect is called a Profit on Sale of Assets, as opposed to Proceeds from Sale of Assets, which is the residual value itself.

8. If there is time, see if you can demonstrate this scenario for yourself.

As an operational cost, decommissioning cost is not capitalised.