Kristin is evaluating a capital budgeting project that should last for 4 years.
ID: 2768335 • Letter: K
Question
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 30%. What would the depreciation expense be each year under each method? Round your answers to the nearest cent.
Explanation / Answer
Straight line depreciation method:
Under this method amount of depreciation would be same each year:
Annual depreciation = (cost of asset – salvage value)/ life
= (375,000 -0)/4
= 93,750
MARRS method:
year
Depreciation basis
MACRS rate
Depreciation
1
375000
33%
123750
2
375000
45%
168750
3
375000
15%
56250
4
375000
7%
26250
year
Depreciation basis
MACRS rate
Depreciation
1
375000
33%
123750
2
375000
45%
168750
3
375000
15%
56250
4
375000
7%
26250
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