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Delta Depreciation

In: Business and Management

Submitted By bonafidesoles
Words 419
Pages 2
Question 1

(i) Delta Air Lines need to update the residual value and depreciation of their aircraft over time in order to calculate the life of the aircraft. The calculation requires estimation and assumptions such as the long-term of usage, maintenance cost, residual value and economic conditions which need constant review.

Technological changes in the industry are one of the reasons why Delta Air Lines decided to extend the useful lives of their flight equipment. Technological advances such as changing engines from pistons to jet engines allow aircrafts to function more efficiently with less wear and tear on the airframes and for longer period of times. With consistently updated with latest technology, aircraft are better maintained and can simply last much longer.

In addition, Delta Air Lines decision to change in depreciation since 1986 had a positive impact on the company’s financial statements. Depreciation is a non-cash item which does not affect cash flows or revenue. However, it does have an effect on the net income. By stretching out depreciation, Delta will see a decrease in depreciation expense resulting in higher net income. This is crucial for not only for Delta Air Lines, but to all airlines companies as well as intense competition and deregulation in the industry were being pressured to show more profits and results.

The disadvantage to decreasing in depreciation is taxes. With decreased depreciation and increased net income, Delta Air Lines’ income taxes increased as well. However, a higher net income for the company will have a better position to negotiate for contracts, it has lower risk factor, allow the company to pay higher salaries and bonuses to their employees and it has a better standing in the industry overall.

(ii) Year – 1985
Aircraft – MD88

Residual Value: $33,000,000 x 10% = $3,300,000

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