The Crystal Company uses straight-line depreciation and is considering a capital expenditure of which the following relevant cash flow data have been estimated: The total depreciation expense over the life of the asset is

Question

The Crystal Company uses straight-line depreciation and is considering a capital expenditure of which the following relevant cash flow data have been estimated:  The total depreciation expense over the life of the asset is

Quizplus · Accepted Answer

Total depreciation expense over the life of the asset is the initial cost minus the salvage value, divided by the useful life. In this case, the initial cost is $2,000,000, the salvage value is $200,000, and the useful life is 10 years. Therefore, total depreciation expense is ($2,000,000 - $200,000) / 10 = $180,000 per year, and over the life of the asset it will be $180,000/year x 10 years = $1,800,000. However, in the problem, it says that the depreciation expense for year 1 was already taken into account. Therefore, the total depreciation expense for years 2-10 is $180,000 x 9 = $1,620,000. Adding the depreciation expense for year 1, we get $1,620,000 + $20,000 = $1,640,000. Since the question is asking for the total depreciation expense over the life of the asset, the answer is $1,640,000 or choice C.

The Crystal Company Uses Straight-Line Depreciation and Is Considering a Capital