The Arcadia Company is contemplating a large capital investment of \($32\) million in new productionline equipment, which is expected to have a useful life of six years and a residual value of \($2\) million at retirement. The company’s controller is uncertain whether the equipment should be depreciated using the straight-line method or the double-declining-balance method. The CEO suggested that a decision be made only after comparing the financial effects of the two methods.

Required

a. Prepare a depreciation schedule for The Arcadia Company for the new equipment assuming (1) use of the straight-line method and (2) use of the double-declining-balance method.

b. The Arcadia Company’s net income exclusive of depreciation expense is expected to be \($6\) million each year for the next six years. Which depreciation method would you recommend to the CEO? Why?