Depreciation MethodSalvage ValueFor every $100 milDepreciatedAnnual Depreciation Prior to 1986Straight-line, 10 years10%100-(.1*100)=9090/10=9$9 mil 1968 – 1993Straight-line, 15 years10%100-(.1*100)=9090/15=6$6 mil After 1993Straight-line, 20 years5%100-(.05*100)=9595/20=4.75$4.75 mil
b. Singapore Airlines Depreciation Method
Depreciation MethodSalvage ValueFor every $100 milDepreciatedAnnual Depreciation Prior to 1989Straight-line, 8 years10%=$10100-(.1*100)=9090/8=11.25$9 mil After 1989Straight-line, 10 years20%=$20100-(.2*100)=8080/10=8$6 mil
2.Both use a straight line depreciation method to depreciate the value of the fleet on the Balance Sheet. However, as noted in the computations above, Singapore depreciates the value of its fleet twice as fast. Additionally, they assume a much higher salvage value of the total purchase price of the asset. The estimation of depreciation and salvage value are both assumptions of the company’s management. There are several reasons to drive the company’s choice of depreciation schedule. Delta may have wanted to reduce depreciation expense recorded on the Balance Sheet and therefore increase the depreciation period to reduce the annual expenditure. As noted in the case text, Delta was reporting losses in other areas and wanted to improve their overall earnings through lessening the affect of fleet depreciation expense. Currently Delta depreciates over 20 years and Singapore depreciates over 10; a significant difference. Some of the differences in the method chosen for depreciation can be based on the use and maintenance schedule of the fleet. In the case, it states that Delta gleaned 21% of its revenues from international travel. In contrast, 56% of Singapore’s revenues are for travel outside of Asia, and it can also be inferred that while 44% of its revenue come from Asia, not all of those are inner continental. If you assume that...