Assume that a company buys land with a building on it for $1,500,000. At the time of purchase the company planned to tear the old building down and build a new building. The cost to tear down and dispose of the old building was $150,000 and they sold some material for $25,000. The cost to build the new building was $5,500,000 and the cost to grade the lot and landscape was $600,000. It is expected the life of the building is 25-40 years with a salvage value of $2,000,000 to $3,000,000.
Discussion Questions:
1) If management desired the smallest depreciation possible over the next five (5) years, what recommendation would you make? Support your recommendation by calculations. Why might the company want to do this?
2) If management desired the largest depreciation possible over the next five (5) years, what recommendation would you make? Support your recommendation by calculations. Why might the company want to do this?
3) Imagine that this company came to you before undertaking this project and presented a proposal outlining the information provided above. What problems or concerns would you have raised for the company to consider?