Kristin is evaluating a capital budgeting project that should last 4 years. The project requires P800,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS (Modified Accelerated Cost Recovery System Method) method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life. The applicable MACRS depreciation rates per year are 33%, 45%, 15%, and 7% form year 1 to 4, respectively. The company’s WACC is 10%, and its tax rate is 40%. a. What would the depreciation expense be each year under each method? b. Which depreciation method would produce the higher NPV, and how much higher would it be?
Kristin is evaluating a capital budgeting project that should last 4 years. The project requires P800,000 of equipment. She is unsure what
a. What would the depreciation expense be each year under each method?
b. Which depreciation method would produce the higher NPV, and how much higher would it be?
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