What happens to depreciation costs if a company adds new plant capacity worth $30 million?

When a company adds new plant capacity worth $30 million, the impact on depreciation costs can be determined by understanding how depreciation is calculated and applied to capital investments.

Capital expenditures such as new plant capacity are typically depreciated over their useful life. If we assume, for example, that the additional capacity has a useful life and a straight-line depreciation method is applied, then the annual depreciation expense would be calculated based on the total value of the new investment divided by its useful life.

If we take a scenario where the new plant capacity is expected to have a useful life of 12 years, the annual depreciation expense for the $30 million investment would amount to $2.5 million per year (calculated as $30 million divided by 12 years). This result indeed indicates a rise in depreciation costs, and if we look closely at the increase in depreciation, it would be $2.5 million annually.

The mention of an increase by $3 million in one of the options does not align with the typical depreciation calculations based on the provided input, making it less accurate.

Additionally, other options either indicate a decrease or no change, which do not correctly reflect the standard treatment of additional capital investment impacting depreciation. Therefore, the correct understanding hinges