Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it...

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 $700,000 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 30%.
How much higher would it be? Round your answer to the nearest dollar?

Solutions

Expert Solution

Solution:

Step 1: Find depreciation for each method - Depreciation is an expense and we are getting tax shield on it so effective expense = Depreciation * (1 - Tax)

Step 2: Find the present value of expense using the cost of capital

Step 3: Compare the expense for these two methods for each year and in total

The difference is given in excel sheet under column difference

Calculations are given in the excel sheet

jeff jeffy answered 1 year ago

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