Page 26 - FINAL CFA I SLIDES JUNE 2019 DAY 8

LOS 29.e: Describe how the choice of depreciation
method and assumptions concerning useful life and Session Unit 8:

residual value affect depreciation expense, financial 29. Long-lived Assets
statements, and ratios, p218

Example: Effect of depreciation methods on net income: SL 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 SL’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.
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