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 book value of SI. 6 billion.

It earns net income equal to approximately 6 percent 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 percent of acquisition cost. American announces a change in depreciation policy: it will use 14-year lives and salvage values equal to 12 percent of original cost. The airplanes are all four years old. Assume an income tax rate of 35 percent.

Calculate the approximate impact on net income of the change in depreciation policy.

Compute both dollar and percentage effects. What conjectures about the earnings quality of an airline can you derive from these computations?