Let's say a company has purchased a building for $20m, which will be depreciated under the straight-line approach. If the annual depreciation is equal to 0.5m each year, what is the useful life assumption being used? Assume the salvage value at the end of the useful life is equal to zero, and round your answer to the nearest whole number. Useful Life Assumption = _____ Years

• A. 10
• B. 20
• C. 40
• D. 60

Answer: (C)

Under straight-line depreciation, annual depreciation equals (cost minus salvage value) divided by the useful life. With salvage value assumed zero, the annual depreciation is simply cost divided by the useful life. Here, 0.5 million per year equals 20 million divided by the useful life, so useful life = 20 / 0.5 = 40 years. The other options would yield annual depreciation totals of 2 million, 1 million, or about 0.333 million respectively, which don’t match the given 0.5 million. So the useful life assumption is 40 years.