INVESTMENT DECISIONS AND DEPRECIATION. Eastern National Bank installed a telephone and data switch in January 19x2. The switch had a list price of

$120,000, and the manufacturer offered Eastern credit terms of 2/10, n/30. Eastern paid for the purchase within the discount period. Eastern paid a local electrical contractor an additional $4,400 to install the switch. At the time the switch was installed, its expected life was 8 years and residual value was $10,000.

Late in 19x4 it became apparent that the bank’s business had grown arid that acquisition of a second switch was necessary. Eastern spent $45,000 on the second switch and put it into service in January 19x5. Eastern estimates that residual value for the second switch is $5,000 and that its expected life is the life that remains on the original switch. Had Eastern not added a second switch, telephone and data-transmission delays would have caused the bank to lose business worth at least $25,000 per year before depreciation.

REQUIRED:

1. Compute the annual depreciation on the original switch. Compute the depreciation on the two switches for 19x5.

2. Bank profits are down in 19x5, and the bank president says, “Adding this second switch was a bad idea because the additional depreciation has cut into our already weak profits.” Comment on the bank president’s assertion.