Question: Cloud Airlines has 3 billion of assets including airplanes costing
Cloud Airlines has $3 billion of assets, including airplanes costing $2.5 billion with net carrying value of $1.6 billion. It earns net income equal to approximately 6% of total assets. Cloud Airlines depreciates its airplanes for financial reporting purposes on a straight-line basis over 10-year lives to a salvage value equal to 10% of acquisition cost. Cloud announces a change in depreciation policy; it will use 14-year lives and salvage values equal to 12% of acquisition cost. The airplanes are all four years old. Assume an income tax rate of 35%. Calculate the approximate impact on net income of the change in depreciation policy. Compute both dollar and percentage effects.
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