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A firm is considering purchasing two assets. Asset A will have a useful life of 15 years and cost $3 million; it will have installation costs of $400,000 but no salvage or residual value. Asset B will have a useful life of 6 years and cost $1.3 million; it will have installation costs of $180,000 and a salvage or residual value of $300,000. Which asset will have a greater annual straight-line depreciation

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Answer:

Asset A provides a greater annual depreciation.

Explanation:

Giving the following information:

Asset A:

Useful life= 15 years

Purchase price= 3,000,000 + 400,000= 3,400,000

Salvage value= 0

Asset B:

Useful life= 6 years

Purchase price= 1,300,000 + 180,000= 1,480,000

Salvage value= 300,000

To calculate the depreciation expense, we need to use the following formula:

Annual depreciation= (original cost - salvage value)/estimated life (years)

Asset A:

Annual depreciation= 3,400,000/15= $226,666.67

Asset B:

Annual depreciation= (1,480,000 - 300,000) / 6

Annual depreciation= $196,666.67

Asset A provides a greater annual depreciation.

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