DEPRECIATION METHODS AND INCOME TAXES. Jim Blakesley established a charter aircraft business by investing $300,000 of his own money and borrowing

$500,000 on a 5-year, 10% note, interest payable each year. The business purchased a used Cessna Citation jet aircraft which Jim plans to charter to businesses. The aircraft cost $590,000. Jim also had to spend $118,000 to overhaul the engines and the airframe. Jim estimates that the life of the Citation is 8 years or 16,000 hours. Residual value is expected to be $60,000.

During the first full year of operations, Jim expects revenues to be $250 per flight hour and operating expenses (except for depreciation) to be $80 per hour. Jim has secured charters for 1,900 flight hours for the first year.

REQUIRED:

1. Compute depreciation expense for the first year of operations using the four depreciation methods.

2. Prepare separate income statements using each of the depreciation methods. Which depreciation method would produce the largest income from operations?

3. Assume that the income tax rate for the business is 34%. Which depreciation method would produce the lowest taxes?

4. If Jim could invest at 15% per year the difference between the largest and the smallest tax payments, how much money would he earn in 1 year on that difference?

What do you conclude about the financial consequences of choosing between one depreciation method and another?