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Question 1. PP&E

(a), (b), (c), (d), (e), (f)

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STATEMENTS OF INCOME December 31, 2008 and 2007 (In thousands of reais, except net income per share at paid-up capital) CONSOLIDATED STATEMENTS OF INCOME NOTE 2008 2007 Gross operating revenues Selling expenses Products 266,217,208 218,050,202 Services, mainly freight 276,872 203,972 266,494,080 218,254,174 Sales charges (51,375,544) (47,676,449) Net operating revenues 215,118,536 170,577,725 Cost of products and services sold (141,623,359) (104,398,043) Gross prot 73,495,177 66,179,682 Operating income (expenses) Selling expenses (7,162,264) (6,059,734) Financial Expenses 18 (4,193,135) (3,292,002) Revenues 18 3 ,494,430 2,417,659 Exchange and monetary variations, net 18 3,827,489 (3,146,547) Administratore and general expenses Management and board of directors remuneration (35,792) (29,259) Administrative (7,21 1,566) (6,398,633) Taxes (362,766) (1,255,511) Cost of research and technological development (1,705,572) (1,712,338) Loss of recovery of assets (933,088) (446,129) Exploratory costs for the extraction of crude oil and gas (3,494,258) (2,569,724) Healthcare and pension plans 21 (1,427,395) (2,494,510) Other operating income and expenses, net 18 (4,712,243) (5,188,393) (24,416,160) (30,175,121) Equity in income of subsidiaries and associated companies Equity in earnings (losses) of investments 13 (874,218) (465,274) Income from operations before income and social contribution 48,204,799 35,539,287 taxes, employee and management prot sharing and minority interest Social contribution 20,5 (4,169,529) (2,876,775) Income tax 20,5 (11,792,449) (8,395,983) Income before employees' and directors' prot-sharing and 32,242,821 24,266,529 minority interest Employees' and directors' prot-sharing 22 (1,344,526) (1,011,914) Income before minority interest 30,898,295 23,254,615 Minorityr interest ' 2,089,497 (1,742,826) Net income for the year 32,987,792 21,511,789 Net income per share at the end of the year - R8 3,76 4,90 See the accompanying notes to the nancial statements. BALANCE SHEETS December 31. 2008 and 2007 (In thousands of reais) CONSOLIDATED ASSETS NOTE 2008 2007 Current assets Cash and cash equivalents 5 15,888,596 13,070,849 Marketable securities 10 288,751 589,788 Trade accounts receivable, net 6 14,903,732 11,328,967 Dividends receivable 7.1 20,101 80,596 Inventories 8 19,977, 1 71 1 7,599,001 Taxes and contributions 20.1 9,641,247 7,781,536 Prepaid expenses 1,393,879 1,429,829 Other current assets 1,461,801 1,493,200 63,575,278 53,373,766 Non-current assets Long-term receivables Trade accounts receivable, net 6 1,326,522 2,901,902 Petroleum and alcohol account - STN 9 809,673 797,851 Marketable securities 10 4,066,280 8,922,370 Project nancing 11.2 Deposits in court 12 1,853,092 1,693,495 Prepaid expenses 1,400,072 1,514,301 Advance for pension plan 21 1,296,810 Deferred income and social contribution taxes 20.3 10,238,308 8,333,490 Inventories 8 303,929 236, 753 Other long-term receivables 1,256,96 1,325,865 21,254,843 22,022,837 Investments 13 5,106,495 7,822,074 Property, plant and equipment 14 190,754,167 139,940,726 Intangible assets 15 8,003,213 5,532,053 Deferred charges 3,469,846 2,536,344 228,588,564 177,854,034 PROPERTY, PLANT AND EQUIPMENT BY TYPE OF ASSET CONSOLIDATED 2008 2007 ESTIMATED USEFUL LIFE ACCUMULATED IN YEARS COST DEPRECIATION NET NET Buildings and improvements 25 to 40 9,382,619 (3,115,564) 6,267,055 3,800,350 Equipment and other assets 3 to 30 119,999,208 (55,854,051) 64, 145,157 49,414,524 Land 1,138,720 1,138,720 854,848 Material 6,034,143 6,034,143 4,247,098 Advances to suppliers 5,189,735 5,189,735 2,624,093 Expansion projects 59,238,898 59,238,898 39,964,366 Oil and gas exploration and production development costs (E&P) 83,883,258 (35,142,799) 48,740,459 39,035,447 284,866,581 (94,112,414) 190,754,167 139,940,726Petrobras, which operates in the energy sector, is Brazil's largest company. Its shares trade on several of the world's leading stock exchanges. Aportion of Petrobras' balance sheet, its income statement, and extracts from a note on PP&.E. are presented in Exhibit 10.1. Required Based on the information provided, answer the following questions: {a} What portion of Petrobras' \"Equipment and other assets\" had been "used up\" by the end of scal 2003? [bl How many years are left in the lives of Petrobras' "Equipment and other assets," on average? State clearly any assumptions that you make in arriving at your estimate. [c] Suppose that Petrobras assumes a zero salvage value for their "Equipment and other assets.\" For each $100 in new asset investments, what is the annual amount of depreciation expense charged to the income statement? id) Suppose that other leading energy companies charge $12 in depreciation expense for each $10!} invested in new equipment. Are Petrobras' depreciation policy assump- tions materially different from those of their competitors! Support your answer. (e) What line item on Petrohras' income statement is most affected by their depreciation policy? Explain why. if} Aside from comparing Petrobras' depreciation policy assumptions to those of their competitors, what other "red ags" might one look for in order to assess whether Petrohras is overly conservative or overly aggressive in taking depreciation expenses? Is there any evidence of these issues on Petrobras' nancial statements