Question

For capital budgeting purposes, an asset's depreciable life is:

A) always equal to the time horizon of an evaluation
B) equal to the asset's useful life
C) equal to the asset's economic life
D) an arbitrary period dictated by the tax code
E) none of the above

Answer 1

For capital budgeting, the depreciable life of an asset is defined by the tax code and may not correspond to its actual use or economic life.

Step-by-step explanation:

The correct answer is B) equal to the asset's useful life. An asset's depreciable life is the period over which it is expected to be used to generate revenues for the business. It is based on the estimated useful life of the asset, which is the period it is expected to provide economic benefits. The depreciable life helps determine the depreciation expense for the asset, which is deducted annually for tax, accounting, and budgeting purposes.

For capital budgeting purposes, an asset's depreciable life is D) an arbitrary period dictated by the tax code. While the other options may seem plausible, it is the tax code that determines the depreciable life for accounting and tax purposes. Depreciable life does not necessarily match the asset's useful life or economic life, which is more related to the actual usage and functionality of the asset. The depreciable life is used for tax deduction calculations and can be significantly different from the asset's working life within a company's operations.