Question

A firm is considering purchasing two assets. Asset L will have a useful life of 15 years and cost​ $4 million; it will have installation costs of​ $750,000 but no salvage or residual value. Asset S will have a useful life of 5 years and cost​ $2 million; it will have installation costs of​ $500,000 and a salvage or residual value of​ $400,000. Which asset will have a greater annual straightminus−line ​depreciation?

Answer 1

Asset S has a greater Straight Line Depreciation.

Explanation:

Straight Line Depreciation amount  = (Capitalised Cost - Salvage Value) / Life of the asset  

Capitalised Cost  = Purchase cost + Installation cost  

For Asset L,  

• Capitalised Cost = $4,000,000.00 + $750,000.00  
• Capitalised Cost = $4,750,000.00  

Asset Life = 15 years  

Salvage/residual value = $0.00  

So,  

Straight Line Depreciation of Asset L  

• Depreciation Amount = $4,750,000 / 15  
• Depreciation Amount = $316,666.67

So, Depreciation Amount for Asset L is $316,666.67

For Asset S,  

• Capitalised cost  = $2,000,000.00 + $500,000.00  
• Capitalised cost = $2,500,000.00  

Asset Life = 5 years  

Salvage/Residual  Value = $400,000.00  

So,  

Straight Line Depreciation of Asset S  

• Depreciation Amount = ($2,500,000 - $400,000) / 5
• Depreciation Amount = $420,000.00  

So, Depreciation Amount for Asset S is $420,000.00

So, Asset S has a greater Straight Line Depreciation.