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Depreciation methods
Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $675,000 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 10%, 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. Do not round your intermediate calculations.
$
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