Tom 3. A reactor of special design is the major item of equipment in a small che
ID: 2809185 • Letter: T
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 usedExplanation / 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)