A firm is considering purchasing two assets.Asset L will have a useful life of 20 years and cost $5 million;it will have installation costs of $1 million but no salvage or residual value.Asset S will have a useful life of 8 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 straight-line depreciation?
A)Asset L has $12,500 more in depreciation per year.
B)Asset L has $37,500 more in depreciation per year.
C)Asset S has $12,500 more in depreciation per year.
D)Asset S has $37,500 more in depreciation per year.

Question

Quizplus · Accepted Answer

To calculate annual straight-line depreciation, we need to divide the cost of the asset (including installation costs) by the useful life of the asset.

- For Asset L: 
Total cost = $5 million + $1 million = $6 million 
Annual straight-line depreciation = $6 million / 20 years = $300,000

- For Asset S: 
Total cost = $2 million + $500,000 = $2.5 million 
Salvage value = $400,000 
Depreciable amount = $2.5 million - $400,000 = $2.1 million 
Annual straight-line depreciation = $2.1 million / 8 years = $262,500

Therefore, Asset L has a greater annual straight-line depreciation:

Annual depreciation of Asset L - Annual depreciation of Asset S = $300,000 - $262,500 = $37,500.

Therefore, the correct answer is B.

A Firm Is Considering Purchasing Two Assets