A firm is considering purchasing two assets. Asset A will have a useful life of

Question

A firm is considering purchasing two assets. Asset A will have a useful life of 15 years and cost $3 million; it will have installation costs of $400,000 but no salvage or residual value. Asset B will have a useful life of 6 years and cost $1.3 million; it will have installation costs of $180,000 and a salvage or residual value of $300,000. Which asset will have a greater annual straight-line depreciation?

A) Asset B has $40,000 more in depreciation per year.

B) Asset B has $30,000 more in depreciation per year.

C) Asset A has $30,000 more in depreciation per year.

D) Asset A has $40,000 more in depreciation per year.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Annual Depreciation = (Cost - Estimated Salvage Value)/Estimated Life

Annual Depreciation (Asset A) = (3000000 + 400000 - 0)/15 = 226666.67 or 226667

Annual Depreciation (Asset B) = (1300000 + 180000 - 300000)/6 = 196666.67 or 196667

Going by above calculations, we can conclude that Asset A has a higher depreciation of 30000 (226667 - 196667) per Year.

Option C (Asset A has $30,000 more in depreciation per year) is the correct answer.

Notes:

Cost of the machine includes purchase value and installation costs.

Thanks.

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