Question

part A ans B

ILS-Cash Flow Estimation and Risk Analysis Q Search this course Click here to read the eBook: Analysis of an Expansion Project DEPRECIATION METHODS Charlene is evaluating a 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 10 % , and its tax rate is 35 % apital budgeting project that should last for 4 years. The project requires $900,000 of equipment. She is unsure what A-Z a. What would the depreciation expense be each year under each method? Round your answers to the nearest cent Year Scenario 1 Scenario 2 (Straight-Line) (MACRS) 4 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. CHAT 13 Power Save&Continu and tic Grade It Now NOV

Answer 1

a.

	Depreciation Expense
Year	Scenario 1	Scenario 2
	Straight-line	MACRS
1	$ 225,000	$ 297,000
2	225,000	405,000
3	225,000	135,000
4	225,000	63,000

b. MACRS

c. $ 12,582

Present value of tax shield of depreciation under straight line method = $ 225,000 x 0.35 x 3.169865 = $ 249,626.87

Present value of tax shield of depreciation under MACRS method = $ 297,000 x 0.35 x 0.90909 + $ 405,000 x 0.35 x 0.82645 + $ 135,000 x 0.35 x 0.75131 + $ 63,000 x 0.35 x 0.68301 = $ ( 94,500 + 117,149.29 + 35,499.40 + 15,060.37 ) = $ 262,209.06

NPV under MACRS would be = $ 12,582