Wandby Inc. (Wandby) owns a building on land it leases from a local municipality. The 28-year land lease was part of an arrangement signed in 1999 that allowed Wandby to operate a business that employed local people without having to incur the cost of buying land. Wanby’s building was constructed in 2000 and was expected to have a life of 25 years. In the current year, 2014, Wandby added an extension to the building. The extension cost $1.5 million and the builder said it should be usable for 20 to 25 years. Wandby’s management has stated that it has no plans to renew the land lease and will not continue the business beyond the lease period. The lease agreement requires that Wandby return the land to the condition it was in at the inception of the lease (before 1999 the land was a park).

Required:
How should Wandby depreciate the extension (method, useful life, and residual value)? Explain your answer fully.