Assignment: PP & E
Petrobras, which operates m the energy sector, is Brazil's largest company. Its shares trade on several of the world's leading stock exchanges. A portion of Petrobras' balance sheet, its income statement, and extracts from a note on PP&E are presented in Exhibit 10.1.
Required
Based on the information provided, answer the following questions:
(a) What portion of Petrobras' "Equipment and other assets" had been "used up" by the end of fiscal 2008?
(b) How many years are left in the lives of Petrobras' "Equipment and other assets," on average? State clearly any assumptions that you make in arriving at your estimate.
(c) Suppose that Petrobras assumes a zero salvage value for their "Equipment and other assets." For each $100 in new asset investments, what is the annual amount of depreciation expense charged to the income statement?
(d) Suppose that other leading energy companies charge $12 in depreciation expense for each $100 invested in new equipment. Are Petrobras' depreciation policy assump¬tions materially different from those of their competitors? Support your answer.
(e) What line item on Petrobras' income statement is most affected by their depreciation policy? Explain why.
(f) Aside from comparing Petrobras' depreciation policy assumptions to those of their competitors, what other "red flags" might one look for in order to assess whether Petrobras is overly conservative or overly aggressive in taking depreciation expenses? Is there any evidence of these issues on Petrobras' financial statements?
Attachment:- Balance-Sheet.pdf