Charlene is evaluating a capital budgeting project that shouldlast for 4 years. The project requires $800,000 of equipment. She is unsure what depreciationmethod 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 evenlyover its 4-year life (ignore the half-year convention for the straight-line method). The applicableMACRS depreciation rates are 33%, 45%, 15%, and 7%, as discussed in Appendix 12A.The company’s WACC is 8%, and its tax rate is 35%.a. What would the depreciation expense be each year under each method?b. Which depreciation method would produce the higher NPV, and how much higherwould it be?
Charlene is evaluating a capital budgeting project that should
last for 4 years. The project requires $800,000 of equipment. She is unsure what
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%, as discussed in Appendix 12A.
The company’s WACC is 8%, and its tax rate is 35%.
a. What would the depreciation expense be each year under each method?
b. Which depreciation method would produce the higher
would it be?
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