Question

xyz company is considering a project that requires a new equipment. the new machine will cost the firm $220,000. in order to have the machine in working condition, xyz will spend $7,000 in installation and $3,000 in shipping. since it will produce more, a $10,000 investment in net working capital is required. the new machine will be depreciated over the straight-line depreciation method down to the salvage value of $5,000. the life of the asset is 5 years. what is the depreciation expense of this project in year 2? round to the nearest penny. do not include a dollar sign in your answer.

Answer 1

The depreciation expense of the new machine for XYZ company in year 2 using the straight-line depreciation method is $45,000.

Step-by-step explanation:

To calculate the yearly depreciation expense for the new machine, we need to know the initial cost, the salvage value at the end of its useful life, and the number of years it will be depreciated. The initial cost includes not only the purchase price but also additional costs for getting the asset ready for its intended use, such as installation and shipping. The initial cost of the machine is $220,000, installation costs are $7,000, and shipping costs are $3,000, summing up to a total initial cost of $230,000. The salvage value at the end of the machine's useful life is $5,000, and its useful life is five years.

Using straight-line depreciation, the calculation is as follows:

Total Depreciable Cost = Initial Cost - Salvage Value
Total Depreciable Cost = $230,000 - $5,000
Total Depreciable Cost = $225,000

Annual Depreciation Expense = Total Depreciable Cost / Useful Life
Annual Depreciation Expense = $225,000 / 5
Annual Depreciation Expense = $45,000

Therefore, the depreciation expense in year 2 is $45,000, the same as any other year during the asset's useful life.