Question 1
The Northwood Clinic purchased a new surgical laser for $ 75,000 on January 1st. The estimated
residual value is $ 7,500. The laser has a useful life of four years and the clinic expects to use it 10,000
hours. It was used 1,600 hours in year 1; 2,100 hours in year 2; 3,400 hours in year 3; 2,900 hours in year
4.
Instructions
a) Calculate the annual depreciation for each of the four years under each of the following methods:
i) straight-line
ii) units-of-production
b) If you were the administrator of the clinic, which method would you deem as most appropriate?
Justify your answer.
c) Which method would result in the lowest reported profit in the first year? Which method would
result in the lowest total reported profit over the four-year period?
d) Which method would result in the lowest cash flow in Year 1? Over the life of the asset?
