Evaluating the Effect of Alternative Depreciation Methods on Key Ratios from an Analyst’s Perspective
You are a financial analyst for Ford Motor Company and have been asked to determine the impact of alternative depreciation methods. For your analysis, you have been asked to compare methods based on a machine that cost $106,000. The estimated useful life is 13 years, and the estimated residual value is $2,000. The machine has an estimated useful life in productive output of 200,000 units. Actual output was 20,000 in year 1 and 16,000 in year 2. (Round results to the nearest dollar.)
Required:
1. For years 1 and 2 only, prepare separate depreciation schedules assuming:
a. Straight-line method.
b. Units-of-production method.
c.Double-de clining-balance method.
Method: ______________________ | ||||
Year | Computation | Depreciation Expense | Accumulated Depreciation | Net Book Value |
At acquisition |
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1 |
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2 |
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2. Evaluate each method in terms of its effect on cash flow, fixed asset turnover, and EPS. Assuming that Ford Motor Company is most interested in reducing taxes and maintaining a high EPS for year 1, what would you recommend to management? Would your recommendation change for year 2? Why or why not?
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