Question

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $325,000 of equipment and is eligible for 100% bonus depreciation. She is unsure whether immediately expensing the equipment or using straight-line depreciation is better for the analysis. 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 company's WACC is 8%, and its tax rate is 30%. a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Round your answers to the nearest dollar. Year Scenario 1 (Straight-Line) $ Scenario 2 (Bonus Depreciation) 0 b. Which depreciation method would produce the higher NPV? -Select- How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

a:

Year	Scenario 1	Scenario 2
0	0	0
1	81250	325000
2	81250
3	81250
4	81250

b: Bonus Depreciation

(Since the expense is larger in earlier years, the cash flow will be larger)

NPV will be higher by $9545

Workings

Year	Scenario 1	Scenario 2	Difference in tax shield
0	0	0	0
1	81250	325000	73125
2	81250		-24375
3	81250		-24375
4	81250		-24375
		NPV	$9,544.69

AutoSave © of HO- Book1 - Excel Sign in - o X File Home Insert Draw Page Layout Formulas Data Review View Help O Tell me what you want to do Share Comments = = = Calibri B I U - 11 - - A À - A - open alle E 3- to Insert Delete - Format General $ - % 9 Number Paste 2' AZ O T- Sort & Find & Filter - Select Conditional Format as Formatting Table Cell Styles Clipboard Font Alignment Styles Cells Editing - X V fx =325000/4 А. HA Year Scenario 1 Scenario 2 Difference in tax shield 0 325000 nm + =325000/4 =325000/4 =325000/4 =325000/4 =(D4-C4)*30% =(D5-C5)*30% =(D6-C6)*30% =(D7-C7)* 30% NPV =NPV(8%,E4:E7)