Effect on net income of changes in estimates for depreciable assets. American 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. American 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. American 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.