can you explain why depreciation charges on the two assets are classified differentl 600771

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 forklift truck for €40 000. The assets would be acquired at the beginning of 2013. The company’s 2012 income statement and other information are shown below:

Additional information:

• 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 classified under other operating expenses.
• Excluding the new machine’s depreciation, cost of goods sold is expected to increase at an annual rate of 7%.
• Excluding the new forklift’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.
• Both the machine and the forklift have an estimated useful life of five years, and zero residual value.
• The tax rate is 30%.

Required

(a) Can you explain why depreciation charges on the two assets are classified differently – COGS for the machine and SG&A for the forklift?

(b) Prepare forecasted income statements for 2013 and 2014, assuming that Dieter Loch AG elects to use straight-line depreciation for both assets.

(c) Calculate the firm’s gross profit percentage, NOPAT margin, and return on invested capital.

(d) 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?