Tom 3. A reactor of special design is the major item of equipment in a small che

Question

Tom 3. A reactor of special design is the major item of equipment in a small chemical plant. The initial cost of the completely installed reactor is $60,000, and the salvage value at the end of the equipment life (depreciation period) is estimated to be $10,000. Excluding depreciation costs for the reactor, the annual expenses for the plant are $100,000. What is the estimate of the equipment life of the reactor if 12 percent of the total annual expenses for the plant are due to the cost for reactor depreciation? The straight-line method for determining depreciation should be used

Explanation / Answer

initial cost = 60,000

salvage value= 50,000

estimate life = x years

depreciation = 12% of expenses (100,000) = 12,000

annual depreciation = initial cost - salvage / estimate life

12,000 = 60,000 - 10,000 / x

x= 4.17 years ( estimate life)

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