Business Valuation and Analysis
Autor: Akper Gahramanov • April 1, 2016 • Case Study • 478 Words (2 Pages) • 925 Views
Case Study 2
Delta Airlines
Akbar Gahramanov
Business valuation and Analysis
Actually there are some possible reasons why Delta may have extended the useful live of the flight equipment. Firstly, the technology and the industry somehow stimulated for these airplanes to be used for longer period. So with the new technology aircrafts were maintained better and updated time to time. Additionally a little changes in the engine (piston) of the aircrafts would help it to function more efficiently with longer period of time. The second reason is the positive effect on the financial statements of the company. Depreciation hasn’t got any effect on cash or revenues of the company but it has got great effect on the expenses. By stretching the useful life of the aircraft they were able to decrease the depreciation expense which led to increase in net income. So changing useful life and residual value resulted in saving huge number of money. A disadvantage for low depreciation is in taxes, so decreasing depreciation means increased income, which also means increased taxes. However showing higher net income also is a proof for a company that it is in a better position, and can attract investor with it and use it as lower risk factor against creditors.
Question 2:
Year | Aircraft | Aircraft No | Purchase price (mln $) | Useful life (years) | Residual Value (mln $) | First-year depreciation (mln $) |
1985 | MD 88 | D2851 | 33 | 10 | 3.3 (10%) | 2.97 |
1986 | MD 88 | D2882 | 39 | 15 | 3.9 (10%) | 2.34 |
1992 | B-757-200 | D3921 | 66 | 15 | 6.6 (10%) | 3.96 |
1993 | B-757-200 | D3932 | 68 | 20 | 3.4 (5%) | 3.23 |
2006 | B-777-200ER | D4061 | 210 | 25 | 10.5 (5%) | 7.98 |
2007 | B-777-200ER | D4072 | 220 | 30 | 22 (10%) | 6.6 |
Historical cost was the method used for valuing the assets, which is simply the original cost of the assets, changed positively if there is improvements made to asset or negative if there is a loss in value, which was simply because of the assets aging problem, and this historical cost is called the book value of the asset. So if we move with this method, we have to revalue if there is an improvement made and then subtract the accumulated depreciation from the initial value of the aircraft in order to find the book value.
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