You are a manager of a firm like Oasis Petroleum, an explorer and developer of shale...

Transcribed Image Text:

You are a manager of a firm like Oasis Petroleum, an explorer and developer of shale oil in the Williston Basin. You own a drilling rig that you purchased for $10 million. The life of a drilling rig is 10 years, and your accountants use straight-line depreciation. It's the start of the year, and the current market value of the rig is $6 million, so you can sell it to another driller for $6 million. If you sell the rig, you can use the funds in an investment that returns a profit of 9 percent. Alternatively, you can rent the rig using a triple net lease (renter pays maintenance costs, property taxes, and property insurance) to another developer for this year for $1.1 million. At the end of the year, the rig will be worth $5.5 million. [a.] What is the depreciation allowance? You are a manager of a firm like Oasis Petroleum, an explorer and developer of shale oil in the Williston Basin. You own a drilling rig that you purchased for $10 million. The life of a drilling rig is 10 years, and your accountants use straight-line depreciation. It's the start of the year, and the current market value of the rig is $6 million, so you can sell it to another driller for $6 million. If you sell the rig, you can use the funds in an investment that returns a profit of 9 percent. Alternatively, you can rent the rig using a triple net lease (renter pays maintenance costs, property taxes, and property insurance) to another developer for this year for $1.1 million. At the end of the year, the rig will be worth $5.5 million. [a.] What is the depreciation allowance?

Answer rating: 100% (QA)

The depreciation allowance is the amount that can be deducted from the value of an asset over its us... View the full answer