Question

Question text

A firm is considering the following two assets. Asset ONE will have a useful life of 12 years and cost $3.33 million; it will have installation costs of $399,000 with no salvage or residual value. Asset TWO will have a useful life of 5 years and cost $1.345 million; it will have installation costs of half of asset ONE's, and a salvage or residual value of $215,090. The firm's tax rate is 34%, and it's cost of capital is 15%. The firm is also planning to borrow money from it's bank in order to pay for the assets. Based on it's current credit rating, it is expected to pay 4.567% for any additional loan from the bank. If the company acquired any of the assets, net working capital is expected to increase by $215,000.

Show and calculate the annual depreciation of both assets.  

Answer 1

Depriciation Calculation

Asset One Purchase Price = $ 3.33 Million

Asset One Salvage Value = $ 0

Asset One Useful life = 12 Years

Annual Depriciation Assuming Straight Line Menthod of Depriciation = (Purchase Price - Salvage Value) / Useful Life = (3330000 - 0) / 12 = $ 277500

Asset Two Purchase Price = $ 1.345 Million

Asset One Salvage Value = $ 215090

Asset One Useful life = 5 Years

Annual Depriciation Assuming Straight Line Menthod of Depriciation = (Purchase Price - Salvage Value) / Useful Life = (1345000 - 215090) / 5 = $ 225982

Please Note Installation Cost are Expensed out and not capitalized and therefore not included in the calculation of depriciation