Question

Depreciation Methods Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $1,650,000 of equipment. The company could use either 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 33.33%, 44.45%, 14.81%, and 7.41%. The project cost of capital is 8%, and its tax rate is 25%. a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar. Scenario 1 (Straight Line) Scenario 2 (MACRS) Year NM + b. Which depreciation method would produce the higher NPV, and how much higher would it be? Do not round intermediate calculations. Round your answer to the nearest cent. The NPV under -Select- will be higher by $

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x 11 A = = = V General File Home Insert Page Layout % Cut Calibri Ea Copy Paste B Format Painter I U - D Clipboard Font ABF391 fx AAZ ABA ABB A A Wrap Text Merge & Center $ - % 8. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Alignment Number Cells ABC ABD ABE ABF ABG ABH ABI ABJ ABK DEPRECIATION UNDER STRAIGHT LINE METHOD = 1650000/4 = 412500 375 376 377 378 379 380 381 382 383 384 385 386 387 DEPRECIATION UNDER MACRS COST 1650000 YEAR MACRS (%) DEPRECIATION BOOK VALUE = COST-DEPRE 33.33 549945 1100055 44.45 733425 366630 14.81 244365 122265 7.41 122265 Nm + 388 389 390 391 392 393 DEPRECIATION EXPENSES YEAR SCENARIO 1 SCENARIO 2 (STRAIGHT LINE) (MACRS) 412500 549945 412500 733425 3 412500 244365 4 412500 122265 W REPLACEMENTS HPR GMAM EAC MACRS LEASE RATIOCASHBUDGET waccBOND STEIN indiffEPS EBIT REPLACEMENT i nvest, EAA MIRR NPV IRR ferences: ED12 STats NPV BETA LEVEO BOU 130% -_ Rea 0 ELEB * 0 ENG 30-08-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins - 2x Σ AutoSum : A A = = = V General File Home Insert Page Layout Formulas % Cut Calibri 11 A Ea Copy Paste Format Painter BI U D- DA Clipboard Font ABH395 fic Wrap Text Merge Merge & Center - Center SF $ % % , 4:0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear Sort & Filter Editing Find & Select Alignment Number Cells AAZ ABA ABE ABF ABG ABH A BI ABJ ABB ABC ABD TAX SAVING DUE TO DEPRECIATION (MACRS) YEAR 395 396 397 398 399 400 1 DEPRE TAX 25% (A) 549945.00 137486.25 733425.00 183356.25 244365.00 61091.25 122265.00 30566.25 PV OF TAX SAVING PVFACTOR PV OF AT 8% (B) TAX SAVING (AXB) 0.925926 127302.08 0.857339 157198.43 0.793832 48496.20 0.735030 22467.11 355463.82 401 402 403 404 405 406 407 408 409 410 411 412 413 TAX SAVING DUE TO DEPRECIATION (STRAIGHT LINE) PVFACTOR PV OF YEAR DEPRE TAX 25% (A) AT 8% (B) TAX SAVING 412500.00 103125 0.925926 95486.11 412500.00 103125 0.857339 88413.07 412500.00 103125 0.793832 81863.95 412500.00 103125 0.735030 75799.95 PV OF TAX SAVING 341563.08 AS WE CAN SEE, MACRS METHOD PRODUCE HIGHER NPV AS IT HAS HIGHER TAX SAVING NPV WILL INCREASE BY = 341563.08 - 355463.82 = 13900.74 i nvest, EAA MIRR NPV IRR REPLACEMENTS HPR GMAM EAC MACRS LEASE RATIOCASHBUDGET waccBOND STEIN indiffEPS EBIT REPLACEMENT ferences: DX15 ELEB H STats NPV BETA LEVEO BOU 130% -_ Red 0 * 0 ENG 30-08-2019