Evaluating the Effect of Alternative Depreciation Methods on Key Ratios from an Analyst’s Perspective You are a financial analyst for Ford Motor Company 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 separate depreciation schedules assuming:
a. Straight line method.
b. Units of production method.
c. Double declining balance method.
|
Method: |
||||
|
Year |
Computation |
Depreciation Expense |
Accumulated Depreciation |
Net Book Value |
|
At acquisition |
||||
|
1 |
||||
|
2 |
||||
2. Evaluate each method in terms of its effect on cash flow, fixed asset turnover, and EPS. Assuming that Ford Motor Company is most interested in reducing taxes and maintaining a high EPS for year 1, what would you recommend to management? Would your recommendation change for year 2? Why or why not?