Valmont Limited purchased high-tech equipment on March 27, 2012, at a cost of $122,000. Management is contemplating the merits of using the diminishing-balance or units-of-production method of depreciation instead of the straight-line method, which it currently uses for other equipment. The new equipment has an estimated residual value of $2,000 and an estimated useful life of either three years or 30,000 units. Demand for the products produced by the equipment is sporadic so the equipment will be used in some years more than others. Assume the equipment produces the following number of units each year: 7,400 units in 2012; 10,200 units in 2013; 9,900 units in 2014; and 2,500 units in 2015. Valmont has a December 31 year end.

Instructions

(a) Prepare separate depreciation schedules for the life of the equipment using the straight-line method, the double diminishing-balance method, and the units-of-production method.

(b) Compare the total depreciation expense and accumulated depreciation under each of the three methods over the life of the equipment.

(c) How does each different method of depreciation affect the company's cash flows?

(d) Which method do you recommend? Why?