A firm is considering purchasing two assets. Asset A will have a useful life of 12 years and cost $4 million; it will have installation costs of $300,000 and a salvage or residual value of $400,000
Asset B will have a useful life of 8 years and cost $3.5 million; it will have installation costs of $200,000 and a salvage or residual value of $800,000. 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 $37,500 more in depreciation per year.
C) Asset B has $30,000 more in depreciation per year.
D) Asset B has $37,500 more in depreciation per year.
Answer: D
Explanation: D) Annual depreciation for Asset A = (Asset Cost + Installation Cost - Salvage Value) / Useful Life = ($4 million + $0.3 million - $0.4 million) / 12 years = $325,000 per year.
Annual depreciation for Asset B = (Asset Cost + Installation Cost - Salvage Value) / Useful Life
= ($3.5 million + $0.2 million - $0.8 million) / 8 years = $362,500 per year.
Thus, Asset B has $362,500 - $325,000 = $37,500 more in depreciation per year.
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