Depreciation methods Kristin is evaluating a capital budgeting project that shou

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Depreciation methods

Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $450,000 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 30%.

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 $450,000 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 30%.

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

The NPV would be the sum of benefit of tax received from depreciation, This would be the amount of depreciation * tax rate that is 35%. then the PV of all cash flows would be calculated by the below mentioned formula:

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 MACRS depreciation method

The NPV is greater by $ 7,516.44

Year Straight line Depreciation Amount Straight line % MACRS Depreciation Amount MACRS % 1        112,500.00 25%          148,500.00 33% 2        112,500.00 25%          202,500.00 45% 3        112,500.00 25%             67,500.00 15% 4        112,500.00 25%             31,500.00 7%

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