Edward L$.$ Vincent is CFO of Energy Resources, Incorporated. The company specializes in the exploration and development of natural

gas. It's near year$-$end, and Edward is feeling terrific. Natural gas prices have risen throughout the year, and Energy Resources is set to

report record$-$breaking performance that will greatly exceed analysts' expectations. However, during an executive meeting this

morning, management agreed to "tone down" profits due to concerns that reporting excess profits could encourage additional

government regulations in the industry, hindering future profitability.

At the beginning of the current year, the company purchased equipment for $$4,428,000.$ The company's standard practice for

equipment like this is to use straight$-$line depreciation over $12$ years using an estimated residual value of $$600,000.$ To address the

issue discussed in the meeting, Edward is considering three options. Option $1$: Adjust the estimated service life of the equipment from

$12$ years to $6$ years. Option $2$: Adjust estimated residual values on the equipment from $$600,000$ to $$0.$ Option $3$: Make both

adjustments.

Required:

Calculate annual depreciation using the company's standard practice.

Calculate annual depreciation for each of the three options and state whether the option would increase or decrease net income.

Which option has the biggest effect on net income?

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Calculate annual depreciation using the company's standard practice.