Assignment #5

Financial Statement Analysis

Q1. Sports Biz, a profitable company, built and equipped a $2,000,000 plant brought into operation
early in Year 1. Earnings of the company (before depreciation on the new plant and before income
taxes) is projected at: $1,500,000 in Year 1; $2,000,000 in Year 2; $2,500,000 in Year 3;
$3,000,000 in Year 4; and $3,500,000 in Year 5. The company can use straight-line or double
declining- balance depreciation for the new plant. Assume the plant’s useful life is 10 years (with
no salvage value) and an income tax rate of 50%.

Required:
Compute the separate effect that each of these two methods of depreciation would have on:
a. Depreciation
b. Income taxes
c. Net income
d. Cash flow (assumed equal to net income before depreciation)
Q2. Assume that a machine costing $300,000 and having a useful life of five years (with no salvage
value) generates a yearly income before depreciation and taxes of $100,000.

Required:
Compute the annual rate of return on this machine (using the beginning-of-year book value as
the base) for each of the following depreciation methods (assume a 25% tax rate):
 Straight-line
 Double Digit
Calculate the following for each method
 Average total life span
 Average age
 Average remaining life
 Average total life span