Problem:

At the beggining of the year, an freight airline purchased a a used airplane for $43,000,000. The freight airline expects the plane to remain useful for 5 years (4,000,000 miles)and to have residual value of $7,000,000. The company expects the plane to be flown 1,400,000 miles the 1st year. Using this data , decide which depreciation method to use for income tax purchases.

Required:

Question 1: Which depreciation method offers the tax advantage for the first year? Decribe the nature of the of the tax advantage.

Question 2: How much extra depreciation will the freight airline get to deduct for the 1st year as compared with the straight-line method?

Note: Show all workings.