Question

If a company spends $20 million to install new footwear-making equipment with capacity to produce 1 million pairs of athletic footwear at its North American production facility, then its annual depreciation costs at that facility will rise by: _________

Answer 1

Assuming the equipment has capacity to produce 1 million pairs of athletic. Its annual depreciation costs at that facility will rise by $2 million or 10%.

Annual depreciation cost

Using this formula

Depreciation = (Cost of equipment - Estimated salvage value) / Estimated useful life

Depreciation= (20 - 0) / 10

Depreciation= $2 million

Or

Annual depreciation= 2/20 ×100

Annual depreciation= 10%

Therefore, the annual depreciation costs at that facility will rise by $2 million or 10%.

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