Question

Bombardier Inc. is one of the largest manufacturers of planes and trains in the world. The company’s long- lived assets exceed $ 9 billion. As a result, depreciation is a significant item on Bombardier’s statement of earnings. You are a financial analyst for Bombardier 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.
Required:
1. For years 1 and 2 only, prepare a separate depreciation schedule for each of the following alternative methods. Round your computations to the nearest dollar.
a. Straight- line
b. Units- of- production
c. Double- declining- balance
2. Evaluate each method in terms of its effect on cash flow, fixed asset turnover ratio, and earnings per share ( EPS). Assuming that Bombardier is most interested in reducing taxes and maintaining a high EPS for year 1, which method of depreciation would you recommend to management? Would your recommendation change for year 2? Why or why not?


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  • CreatedAugust 04, 2015
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