Depreciation methods Kristin is evaluating a capital budgeting project that shou

Question

Depreciation methods

Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $875,000 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 13%, and its tax rate is 35%.

Which depreciation method would produce the higher NPV?
-Select-Straight-LineMACRSItem 9

How much higher would the NPV be under the preferred method? Round your answer to two decimal places.
$  

Depreciation methods

Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $875,000 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 13%, and its tax rate is 35%.

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 $   $  

Which depreciation method would produce the higher NPV?
-Select-Straight-LineMACRSItem 9

How much higher would the NPV be under the preferred method? Round your answer to two decimal places.
$  

Explanation / Answer

NPV would calculated as the present value of tax benefit on depreciation which the company would get,

Tax benefit would be calculated as depreciation amount* tax rate

  PV of cash flow is calculated as Cash flow/(1+i)^n, where is the cost of capital that is 13% and n is the number of period.

NPV is greater in case of MACRS depreciation method

NPV is greater by 14,615.29

Year Straight line Depreciation Amount Straight line % MACRS Depreciation Amount MACRS % 1        218,750.00 25%          288,750.00 33% 2        218,750.00 25%          393,750.00 45% 3        218,750.00 25%          131,250.00 15% 4        218,750.00 25%             61,250.00 7%

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.