Question

Click here to read the eBook: Analysis of an Expansion Project DEPRECIATION METHODS Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires 3950,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, and 7%. The company's WACC is 11%, and its tax rate is 40%. a. What would the depreciation expense be each year under each method? Round your answers to the nearest cent. Year - Scenario 1 (Straight-Line) Scenario 2 (MACRS) b. Which depreciation method would produce the higher NPV? Select How much higher would the NPV be under the preferred method? Round your answer to two decimal places. Do not round your intermediate calculations

Answer 1

Year Scenario1 Scenario2
1 =950000/4=237500 =950000*33%=313500

2 =950000/4=237500 =950000*45%=427500

3 =950000/4=237500 =950000*15%=142500

4 =950000/4=237500 =950000*7%=66500

MACRS depreciation produces higher NPV
NPV would be higher by present value of depreciation*tax rate=((313500-237500)/1.11+(427500-237500)/1.11^2+(142500-237500)/1.11^3+(66500-237500)/1.11^4)*40%=16228.22119