A firm is considering purchasing two assets. Asset L will have a usefu

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.

ANSWER

Answer: B
Explanation: B) Annual depreciation for Asset L = (Asset Cost + Installation Cost – Salvage Value) / Useful Life = ($5 million + $1 million – 0) / 20 years = $300,000 per year.
Annual depreciation for Asset S = (Asset Cost + Installation Cost – Salvage Value) / Useful Life
= ($2 million + $0.50 million – $0.4 million) / 8 years = $262,500 per year.
Thus, Asset L has $300,000 -$262,500 = $37,500 more in depreciation per year.