Airline X depreciates itsairplanes over a 15-year period and estimates a salvage value of 10% ofthe cost of the plane. At the same time, Airline Y depreciates identicalairplanes over a 25-year period and estimates a salvage value of 15% ofthe cost of the plane. As expected, these different assumptionsresulted in different operating results. For example, if an airplanecosts $ 10 million, Airline X will depreciate $ 260,000 more per yearfor 15 years than Airline Y.
Which companys estimate ofuseful life more closely reflects reality? Will you feel comfortable as apassenger in a 25-year old airplane? Does the fact that Airline Ysubsequently went out of business provide any information as to why itsestimates were so substantially different from those of financiallysound Airline X?
