ABC already spent $85,000 on a feasibility study for a machine that will produce a new product. The machine will cost $2,575,000. Required modifications will cost $375,000. ABC will need to invest $75,000 for additional inventory. The machine has an IRS approved useful life of 7 years; it is presumed to have no salvage value. It will only be operated for 3 years, after which it will be sold for $600,000. What is the depreciable cost basis of the machine?
A) $3,025,000
B) $2,950,000
C) $2,575,000
D) $2,350,000

Question

Quizplus · Accepted Answer

The depreciable cost basis of the machine is the cost of the asset minus any costs that are not depreciable (such as the feasibility study and inventory). Therefore:
Depreciable Cost Basis= $2,575,000 (cost of the machine) + $375,000 (required modifications) - $85,000 (feasibility study) - $75,000 (inventory) = $2,790,000
Since the machine will only be operated for 3 out of its 7-year useful life, the depreciable cost basis will be divided by 7 and multiplied by 3, giving a total depreciation of:
Depreciation= $2,790,000/7 x 3 = $1,197,857 per year
Therefore, the correct choice is B: $2,950,000.

ABC Already Spent $85,000 on a Feasibility Study for a Machine