CFA Level 1: Asset Service Life Calculation

Asset Service Life Calculation

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Question

A long-term asset currently has a book value of $45,000 and a salvage value of $5,000. It was acquired 3 years ago at a cost of $75,000. If the firm uses straight- line depreciation, how many years is the asset expected to be in service?

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A. B. C. D.

B

In Straight-line method, depreciation = (1/n)*(acquisition cost - salvage value). The accumulated depreciation in 3 years = 75,000 - 45,000 = $30,000. Hence, per year depreciation equals $10,000 = (1/n)*(75,000-5,000). Thus, n = 7 years, implying the asset will be in service for another 4 years.

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