The next thing we need is to calculate annual depreciation expense. We use straight- line depreciation....

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The next thing we need is to calculate annual depreciation expense. We use straight- line depreciation. In spite of the simplicity of this method, it can become a little confusing if we are not paying attention to detail. There are two ways to calculate depreciation expense. A) you are asked to depreciate a long term asset over a project's life that can be shorter than the asset's useful life. For example: Asset's useful life is 15 years and project life is ten years. The way to calculate depreciation expense in this case is by taking the depreciable base (the cost of the asset plus shipping and installation) and dividing it by 15 to get annual depreciation expense (at the end of the project's life you have a book value of the asset that's equal to the original depreciable base minus the sum of all the depreciation expenses you took over the life of the project (that is called accumulated depreciation). B) You are told to depreciate the asset over the ten-year life of the project down to a given book value. In this case we don't use the useful life of the asset. Instead, we subtract the given book value from the depreciable base and divide by project life to get the depreciation expense. Let's try these two methods and see if we can get depreciation expense in each scenario. Question 2 (A): You buy an asset today for $2,000,000 and you pay $100,000 in shipping and installation. The useful life of the asset is 12 years but you intend to use it for only ten years and then sell it. How much would the annual depreciation expense be? Question 2 (B): You buy an asset today for $2,000,000 and you pay $100,000 in shipping and installation. You intend to depreciate the asset over the ten-year life of the project down to a book value of $350,000. How much would the annual depreciation expense be? The next thing we need is to calculate annual depreciation expense. We use straight- line depreciation. In spite of the simplicity of this method, it can become a little confusing if we are not paying attention to detail. There are two ways to calculate depreciation expense. A) you are asked to depreciate a long term asset over a project's life that can be shorter than the asset's useful life. For example: Asset's useful life is 15 years and project life is ten years. The way to calculate depreciation expense in this case is by taking the depreciable base (the cost of the asset plus shipping and installation) and dividing it by 15 to get annual depreciation expense (at the end of the project's life you have a book value of the asset that's equal to the original depreciable base minus the sum of all the depreciation expenses you took over the life of the project (that is called accumulated depreciation). B) You are told to depreciate the asset over the ten-year life of the project down to a given book value. In this case we don't use the useful life of the asset. Instead, we subtract the given book value from the depreciable base and divide by project life to get the depreciation expense. Let's try these two methods and see if we can get depreciation expense in each scenario. Question 2 (A): You buy an asset today for $2,000,000 and you pay $100,000 in shipping and installation. The useful life of the asset is 12 years but you intend to use it for only ten years and then sell it. How much would the annual depreciation expense be? Question 2 (B): You buy an asset today for $2,000,000 and you pay $100,000 in shipping and installation. You intend to depreciate the asset over the ten-year life of the project down to a book value of $350,000. How much would the annual depreciation expense be?

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