Question

Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $1,770,000 of equipment. The company could use either 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 33.33%, 44.45%, 14.81%, and 7.41%. The project cost of capital is 8%, and its tax rate is 25%.

1. What would the depreciation expense be each year under each method? Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.

Year	Scenario 1 (Straight Line)	Scenario 2 (MACRS)
1	$	$
2	$	$
3	$	$
4	$	$

Which depreciation method would produce the higher NPV, and how much higher would it be? Do not round intermediate calculations. Round your answer to the nearest cent.

The NPV under -Select-Scenario 1Scenario 2 will be higher by $   .

Answer 1

The NPV under Scenario 2 will be higher by $14911.71

Year	Scenario 1	Tax shield	Scenario 2	Tax shield
1	442500	110625	589941	147485.25
2	442500	110625	786765	196691.25
3	442500	110625	262137	65534.25
4	442500	110625	131157	32789.25
NPV		$366,404.03		$381,315.74
Difference		$14,911.71

WORKINGS