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 $925,000 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%.

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

b. Which depreciation method would produce the higher NPV?

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

Straight-line

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