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 $375,000 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%.

What would the depreciation expense be each year under each method? Round your answers to the nearest cent.

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.
$  

Year Scenario 1
(Straight-Line) Scenario 2
(MACRS) 1 $   $   2 $   $   3 $   $   4 $   $  

Explanation / Answer

Depreciation under MACR method

MACR Method will provide higher NPV as compare to straight line method depreciation

Year PVF @ 12% Depreciation ( Straight line method) Tax Saving on depreciation PV @ 12% 1 0.8929 93750              32,813        29,298.28 2 0.7972 93750              32,813        26,158.13 3 0.7118 93750              32,813        23,355.94 4 0.6355 93750              32,813        20,852.34 Total 375000 131250              99,665

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

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