How to Calculate Option Price

1. Calculate the annual depreciation expense that Delta and Singapore would record for each $100 gross value of aircraft.

(a) For Delta, what was its annual depreciation expense (per $100 of gross aircraft value) prior to July 1, 1986; from July 1, 1986 through March 31, 1993; and from April 1, 1993 on?

Prior to July 1,1986 depreciation expense =100*(1-10%)/10=9

from July 1, 1986 through March 31,1993 depreciation expense =100*(1-10%)/15=6

from April 1, 1993 on depreciation expense =100*(1-5%)/20=4.75

(b) For Singapore, what was its annual depreciation expense (per $100 of gross aircraft value) prior to April 1, 1989; and from April 1, 1989 on?

prior to April 1, 1989 depreciation expense =100*(1-10%)/8=11.25

from April 1, 1989 on depreciation expense =100*(1-20%)/10=8%

2. Are the differences in the ways that the two airlines account for depreciation expense significant? Why would companies depreciate aircraft using different depreciable lives and salvage values? What reasons could be to support these differences? Is different treatment proper?

Delta use longer depreciable lives than the Singapore Airline. Accordingly, Delta has smaller salvage values than Singapore does.

They all use straight-line depreciation, which allocates the depreciable cost (defined as purchase price less estimated salvage value) equally over the asset’s estimated useful life, therefore ,the longer the depreciable lives, the smaller depreciation expense each company has .

Because Delta tend to face more pressure to report profits for owners, since it is 100 percent publicly owned. however, Singapore Airlines is owned by the Singapore government.

3. Assuming the average value of flight equipment that Delta had in 1993, how much of a difference do the depreciation assumptions it adopted on April 1, 1993 make? How much more or less will its annual depreciation expense be compared to...