Question

Westchester City is constructing a new city hall. The building will cost $40 million and is estimated to have a useful life of 40 years. Based on the experience of similar cities and the best estimates of the city’s engineers, Westchester’s planners expect that at the end of 40 years the building will have to be torn down and rebuilt, so it is not expected to have any value at the end of 40 years. It will cost $6 million to acquire equipment for the new center. Equipment is assumed to last for 10 years. The city estimates that the equipment can be sold for 20 percent of its cost at the end of its useful life. If the city undertakes this project, what will the building and equipment expense be in the first year after the center is opened?

Answer 1

The building and equipment expense in the first year after the center is opened would be $5.8 million.

Step-by-step explanation:

To calculate the building and equipment expense in the first year after the center is opened, we need to consider the depreciation of both the building and the equipment.

The building has a useful life of 40 years and is estimated to have no value at the end of 40 years. So, the annual depreciation expense for the building is $40 million divided by 40 years, which is $1 million.

The equipment has a useful life of 10 years and is estimated to have a salvage value of 20% of its cost. So, the annual depreciation expense for the equipment is $6 million minus ($6 million times 20%), which is $4.8 million.

Therefore, the building and equipment expense in the first year after the center is opened would be $1 million plus $4.8 million, which equals $5.8 million.