Page 33 - FINAL CFA I SLIDES JUNE 2019 DAY 8
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Session Unit 8:
29. Long-lived Assets
LOS 29.e: Describe how the choice of depreciation method and assumptions concerning useful life and residual value
affect depreciation expense, financial statements, and ratios, p218
Example: Effect of depreciation methods on net income: Sackett Laboratories purchases chemical processing
machinery for $550,000. The equipment has an estimated useful life of 5 years and an estimated salvage value of
$50,000. The company expects to produce 20,000 units of output using this machinery, with 6,000 units in each
of the first two years, 3,000 units in the next two years, and 2,000 units in the fifth year. The company’s effective
tax rate is 30%. Revenues are $600,000 per year, and expenses other than depreciation are $300,000 in each year.
Calculate Sackett’s net income and net profit margin if the company depreciates the machinery using (a) the
straight-line method, (b) the double declining balance method, and (c) the units of production method.
tanties
