Kristin is evaluating a capital budgeting project that should last for 4 years.

Question

Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $925,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRs ETF × y£2 CengageNOW! Onlne tex st.cengagenow.com/ilrn/takeAssignment/takeAssignmentMain.do eBook roblem 12-6 epreciation methods Kristin is evaluating a capital budgeting project that should last for 4 years. The profect requires $925,000 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 deprediated evenly over is 4 year life (ignore the hait-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%·45%, is%, and 7%. The company's wacc it is, andt, tar rate soe a. What would the deprediation expense be each year under each method? Round your answers to the nearest cent. Scenario 1 (Straight-Line) Scenario 2 (MACRS) Year b. Which depreciation method would produce the higher NPV How much Ngher would the liPV be under the preferred method, Reurd yoursw_.tw0 deim-pw.s Probbeni 120

Explanation / Answer

a)

Straight Line Depreciation

Year 1 = 925000/4 = $ 231250

Year 2 = 925000/4 = $ 231250

Year 3 = 925000/4 = $ 231250

Year 3 = 925000/4 = $ 231250

MACRS

Year 1 = 925000*33% = $ 305250

Year 2 = 925000*45% = $ 416250

Year 3 = 925000*15% = $ 138750

Year 4 = 925000*7% = $ 64750

b)

MACRS

c)

NPV higher under preferred method = (305250-231250)*30%/1.11 + (416250-231250)*30%/1.11^2  + (138750-231250)*30%/1.11^3 + (64750-231250)*30%/1.11^4

NPV higher under preferred method = $ 11,850.87

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