when calculating the replacement cost of an asset a company must account for depreciation costs a business capitalizes an asset purchase by posting the cost of a new asset to an asset account and the asset account is depreciated over the asset s useful life the cost of the asset includes all costs to prepare the asset for use such as insurance costs and the cost of setup 
some assets are depreciated on a straight line basis meaning the cost of the asset is divided by the useful life to determine the annual depreciation amount other assets are depreciated on an accelerated basis so more depreciation is recognized in the early years and less in later years the total depreciation expense recognized over the asset s useful life is the same regardless of which method is used given the cost of replacing expensive assets well managed firms create a capital expenditure budget to plan for both future asset purchases and for how the firm will generate cash inflows to pay for the new assets budgeting for asset purchases is critical because replacing assets is required to operate the business a manufacturer for example budgets for equipment and machine replacement and a retailer budgets to update the look of each store 