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%.
Year Scenario 1
(Straight-Line) Scenario 2
(MACRS) 1 $93,750 $123,750 2 $93,750 $168,750 3 $93,750 $56,250 4 $93,750 $26,250
- 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.
$_______
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%.
| Year | Scenario 1 (Straight-Line) | Scenario 2 (MACRS) |
| 1 | $93,750 | $123,750 |
| 2 | $93,750 | $168,750 |
| 3 | $93,750 | $56,250 |
| 4 | $93,750 | $26,250 |
- 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.
$_______
Related questions
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.
| 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.
$
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.
| Year | Scenario 1 (Straight-Line) | Scenario 2 (MACRS) |
| 1 | $ | $ |
| 2 | $ | $ |
| 3 | $ | $ |
| 4 | $ | $ |
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.
$
