Depreciation Methods
Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $600,000 of equipment. The company could use either 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 33.33%, 44.45%, 14.81%, and 7.41%. The company's WACC is 9%, and its tax rate is 35%.
What would the depreciation expense be each year under each method?
a. Year Scenario 1
(Straight Line) Scenario 2
(MACRS) 1 $ $ 2 $ $ 3 $ $ 4 $ $
b. Which depreciation method would produce the higher NPV?
c. How much higher would it be? Round your answer to the nearest dollar.
$
Depreciation Methods
Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $600,000 of equipment. The company could use either 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 33.33%, 44.45%, 14.81%, and 7.41%. The company's WACC is 9%, and its tax rate is 35%.
What would the depreciation expense be each year under each method?
a. Year | Scenario 1 (Straight Line) | Scenario 2 (MACRS) |
1 | $ | $ |
2 | $ | $ |
3 | $ | $ |
4 | $ | $ |
b. Which depreciation method would produce the higher NPV?
c. How much higher would it be? Round your answer to the nearest dollar.
$