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 A has $30,000 more in depreciation per year.
B) Asset A has $40,000 more in depreciation per year.
C) Asset B has $30,000 more in depreciation per year.
D) Asset B has $40,000 more in depreciation per year.
Answer: A
Explanation: A) Annual depreciation for Asset A = (Asset Cost + Installation Cost - Salvage Value) / Useful Life = ($3 million + $0.4 million - 0) / 15 years = $226,666.67, or about $226,667 per year.
Annual depreciation for Asset B = (Asset Cost + Installation Cost - Salvage Value) / Useful Life
= ($1.3 million + $0.18 million - $0.3 million) / 6 years = $196,666.67, or about $196,667 per year.
Thus, Asset A has $226,667 - $196,667 = $30,000 more in depreciation per year.
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