Question

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $150,000 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 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%. The company's WACC is 10%, and its tax rate is 30%.

What would the depreciation expense be each year under each method? Round your answers to the nearest cent.

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

Which depreciation method would produce the higher NPV?

How much higher would the NPV be under the preferred method? Round your answer to two decimal places. Do not round your intermediate calculations.
$

Answer 1

Cost	150,000
SLM
Year	Depreciation	Depreciation	Tax benefit @ 30%	PV of these Benefits @ 10%	PV
1	25%	37,500	11,250	0.909	10,227
2	25%	37,500	11,250	0.826	9,298
3	25%	37,500	11,250	0.751	8,452
4	25%	37,500	11,250	0.683	7,684
				NPV	35,661
MACARS
Year	Depreciation	Depreciation	Tax benefit @ 30%	PV of these Benefits @ 10%	PV
1	33%	49,500	14,850	0.909	13,500
2	45%	67,500	20,250	0.826	16,736
3	15%	22,500	6,750	0.751	5,071
4	7%	10,500	3,150	0.683	2,151
				NPV	37,458
Difference in NPV	1,797
So MACARS will provide higher NPV as it will give higher tax shield on depreciation. The difference will be 1797