Question

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $575,000 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 12%, and its tax rate is 35%.

1. 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)
   1	$	$
   2
   3
   4

2. Which depreciation method would produce the higher NPV?
   -Select- Straight-Line OR MACRS
   
   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

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

07:30 C w ENG 99+ 31-07-2020 28 Х ACQ364 . ACH ACI ACJ ACK ACL ACM ACN ACO ACP ACQ ACR ACS АСТ 4 341 342 343 344 345 346 CHARLENE 347 DEPRECIATION UNDER STRAIGHT LINE METHOD = 575000/4 = 143750 348 349 350 351 352 353 354 355 DEPRECIATION UNDER MACRS COST 575000 YEAR MACRS (%) DEPRECIATION BOOK VALUE = COST -DEPRE 1 33 189750 385250 2 45 258750 126500 3 15 86250 40250 4 7 40250 0 356 357 358 359 360 361 362 DEPRECIATION EXPENSES YEAR SCENARIO 1 (STRAIGHT LINE) 1 143750 2 143750 SCENARIO 2 (MACRS) 189750 258750 3 143750 86250 40250 363 4 143750 364 EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEA ... +

C w ENG 07:31 31-07-2020 99+ 28 Х ACQ387 fic . ACH ACI ACJ ACK ACL ACM ACN ACO ACP ACQ ACR ACS АСТ 4 364 TAX SAVING DUE TO DEPRECIATION (MACRS) 365 366 367 1/(1+r)^n PVFACTOR AT 12% 0.892857 PV OF TAX SAVING YEAR DEPRE 368 369 370 TAX @ 35% 66412.5 1 59296.88 189750.00 258750.00 2 90562.5 72195.87 0.797194 0.711780 3 30187.5 371 372 373 86250.00 40250.00 21486.87 8952.86 4 14087.5 0.635518 PV OF TAX SAVING 161932.47 374 375 376 377 378 379 380 381 382 383 384 385 386 387 TAX SAVING DUE TO DEPRECIATION (STRAIGHT LINE) PVFACTOR PV OF YEAR DEPRE TAX @ 35% AT 12% TAX SAVING 1 143750.00 50312.5 0.892857 44921.88 2 143750.00 50312.5 0.797194 40108.82 3 143750.00 50312.5 0.711780 35811.44 4 143750.00 50312.5 0.635518 31974.50 PV OF TAX SAVING 152816.64 AS WE CAN SEE, MACRS METHOD PRODUCE HIGHER NPV AS IT HAS HIGHER TAX SAVING NPV WILL INCREASE BY = 161932.47-152816.64 = 9115.83 b с EAC MACRS RELEVANT Ml-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEA ... +