Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $975,000 of equipment and is eligible for 100% bonus depreciation. She is unsure whether immediately expensing the equipment or using straight-line depreciation is better for the analysis. 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 company's WACC is 12%, and its tax rate is 20%. a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Round your answers to the nearest dollar. Year 0 $ 1 $ 2 $ 3 4 $ $ Scenario 1 (Straight-Line) Scenario 2 (Bonus Depreciation) $ $ $ b. Which depreciation method would produce the higher NPV? -Select- How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar.
Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $975,000 of equipment and is eligible for 100% bonus depreciation. She is unsure whether immediately expensing the equipment or using straight-line depreciation is better for the analysis. 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 company's WACC is 12%, and its tax rate is 20%. a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Round your answers to the nearest dollar. Year 0 $ 1 $ 2 $ 3 4 $ $ Scenario 1 (Straight-Line) Scenario 2 (Bonus Depreciation) $ $ $ b. Which depreciation method would produce the higher NPV? -Select- How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $975,000 of equipment and is eligible for 100% bonus depreciation. She is unsure whether immediately
expensing the equipment or using straight-line depreciation is better for the analysis. 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 company's WACC is 12%, and its tax rate is 20%.
a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Round your answers to the nearest dollar.
Year
Scenario 1
(Straight-Line)
Scenario 2
(Bonus Depreciation)
0
$
1
$
2
$
3
4
$
b. Which depreciation method would produce the higher NPV?
-Select-
How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
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