Problem 11-5
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 $900,000 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 50%.
What would the depreciation expense be each year under each method?
Year Scenario 1
(Straight Line) Scenario 2
(MACRS) 1 $ $ 2 $ $ 3 $ $ 4 $ $
How much higher would it be? Round your answer to the nearest dollar.
Problem 11-5
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 $900,000 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 50%.
What would the depreciation expense be each year under each method?
| Year | Scenario 1 (Straight Line) | Scenario 2 (MACRS) |
| 1 | $ | $ |
| 2 | $ | $ |
| 3 | $ | $ |
| 4 | $ | $ |
How much higher would it be? Round your answer to the nearest dollar.
Related questions
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.
$_______
Depreciation methods
Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $300,000 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 14%, and its tax rate is 40%.
A. 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 | $ _____ | $ _____ |
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.
$ _____
