1. Can you explain why depreciation charges on the two assets are classified differently - COGS for the machine and SG&A for the forklift?
2. Prepare forecasted income statements for 2013 and 2014, assuming that Dieter Loch AG elects to use straight-line depre- ciation for both assets.
3. Calculate the firm's gross profit percentage, NOPAT margin, and return on invested capital.
4. Repeat (b), assuming that the company elects to use the double- declining balance method instead for both assets.
5. Repeat (c). How does the choice of different depreciation methods affect the behavior of the ratios in 2013 and 2014?

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PROBLEMS 10.1 Comparing the Effects of Depreciation Choice on Financial Ratios Dieter Loch AG is about to purchase two new assets - a machine for 75,000 and a state-of-the art forkJift truck for 40,000. The assets would be acquired at the beginning of 2013. The company's 2012 income statement and other infonnation are shown below: Sal es 5 50,000 Cost of goods sold 310,000 Gross prot 240,000 56\" expenses 140,000 Income before tax 100,000 Income taxes 30,000 NOF'AT ?0,000 Additional information: 0 Dieter Loch management expects the addition of the two assets to generate a 20% annual growth rate in sales. ' Depreciation on the new machine will be included as part of cost of goods sold. Depreciation on the new forklift will be classied under other operating expenses. ' Excluding the new machine's depreciation, cost of goods sold is expected to increase at an annual rate of 7%. 0 Excluding the new fork]ift's depreciation, selling, general, and administrative (SG&A} expenses are expected to grow at an annual rate of 5%. - Dieter Loch's invested capital, not counting the new machine and forklift, is expected to increase at a rate of 15% per year. Average invested capital at the end of 2012 was 500,000. 0 Both the machine and the forklift have an estimated useful life of five years, and zero residual value. 0 The tax rate is 30%. Required a. Can you explain why depreciation charges on the two assets are classied differently COGS for the machine and SGJLA for the forklift? h. Prepare forecasted income statements for 2013 and 2014, assuming that Dieter Loch AG elects to use straight-line depre- ciation for both assets. c. Calculate the rm's gross prot percentage, NOPAT margin, and return on invested capital. 1]. Repeat (b), assuming that the company elects to use the double- declining balance method instead for both assets. e. Repeat (c). How does the choice of different depreciation methods affect the behavior of the ratios in 2013 and 2014'? 10.2 Analyzing Depreciation on PPEE The following note is taken from the 2004 Annual Report of Exx- onMobil Corporation: December 31. 2004 December 31, 2003 Historical Accumulated Historical Accumulated coat depreciation coat depreciation [mil lions of dollars] Upstream $148,024 $62,013 $133,?01 $58,?2? Downstream 62,014 29,810 59,939 29,566 Chemical 21,??? 10,049 20,623 10,115 other 10,60? 6,?6? 10,052 6,55? Total $242,422 $108,639 $229,315 $104,965 In the upstream segment, depreciation is on a unit-of- production basis, so depreciable life will vary by field. In the downstream segment, investments in renery and . . . man- ufacturing facilities are generally depreciated on a straight- line basis over a 25-year life and service station buildings and xed improvements over a 20year life. In the chemical segment, investments in process equipment are depreciated on a straight-line basis over a 20year life. Accumulated depreciation and depletion totaled $133,783 million at the end of 2004 and $124,350 million at the end of 2003. Required Based on the above note, answer the following: a. By 2004, what percentage of the upstream segment costs have been depreciated? Assume no salvage value and assume that in 2005, no upstream acquisitions or divestitures take place. If the upstream PParE are used to produce 10% of their capabilities, what would be the depreciation expense and net book value at the end of 2005? b. By December 31, 2003, assuming a 20% salvage (residual) value, on average, what is the age of the chemical PP&E'? c. Assuming no divestiture or retirement of assets, what was the depreciation expense for all PP&E in 2004? Template for Problems 10.1 and 10.5 * File Edit View Insert Format Data Tools Add-ons Help Last edit was 7 minutes ago in a $ 7 75% * $ % .0 .00 123 Default (Ca... . 12 . B IS A . H E 3 . = - J . H . co # Y . E. M42 fX Problem 10.1 Machine used in manufacturing, forklift used after production 2012 2013 2014 Sales 550,000 660,000 792,000 COGS, excluding depreciation on new machine 310,000 331,700 354,919 Depreciation on new machine Gross Profit 240,000 28,300 437,081 SG&A, excluding depreciation on forklift 140,000 Depreciation, forklif Income before tax 100,000 Income taxes (30%) 30,000 Net Operating Profit After Tax (NOPAT) 70,000 Gross Profit Percentage = Gross Profit/Sales 43.64% NOPAT Margin = NOPAT/Sales 12.73% ROIC = NOPAT/Average Invested Capital* NA *Calculation for Average Invested Capital Invested Capital, Beginning NA plus: 15% Annual Growth NA (Do not include machine & forklift c plus: machine & forklift NA less: depreciation on machine and forklift NA Invested Capital, Ending NA Invested Capital, Average NA 2012 2013 2014 Sales 550,000 COGS, excluding depreciation on new machine 310,000 Depreciation on new machine Gross Profit 240,000 SG&A, excluding depreciation on forklift 140,000 Depreciation, forklift Income before tax 100,000 Income taxes (30%) 30,000 Net Operating Profit After Tax (NOPAT) 70,000 Gross Profit Percentage = Gross Profit/Sales 43.64% NOPAT Margin = NOPAT/Sales 12.73% ROIC = NOPAT/Average Invested Capital* NA *Calculation for Average Invested Capital Invested Capital, Beginning NA plus: 15% Annual Growth NA (Do not include machine & forklift cost and depreciation) plus: machine & forklift NA less: depreciation on machine and forklift NA Invested Capital, Ending NA Invested Capital, Average NA 59 60 Answer to Question: Problem 10.1 - Problem 10.5 - Problem 10.8 Hints (Sunday)