Kristin is evaluating a capital budgeting project that should last for 4 years.

Question

Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $150,000 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 11%, and its tax rate is 40%.

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

Explanation / Answer

                            

            I don't know what the net income is, so I'm wasn't able to calculate the NPV like it is supposed to.
            Straight line npv(11,-150000,{37500,37500,37500,37500,}) = -$33658.29

            MACRS npv(11,-150000,{49500,67500,22500,10500,}) = -$27252.41

How much higher would the NPV be under the preferred method? Round your answer to two decimal places.
$ 6405.88

Year Scenario 1
(Straight-Line) Scenario 2
(MACRS) 1 $ 37500 $ 49500 2 $ 37500 $ 67500 3 $ 37500 $ 22500 4 $ 37500 $ 10500

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