David Mining is contemplating investing $105,700 in machinery that will generate annual savings of $57,250 in...

David Mining is contemplating investing $105,700 in machinery that will generate annual savings of $57,250 in operating costs. The useful life of the machinery is 4 years and no salvage value is expected. The controller has suggested that the sum of years digits (SYD) depreciation be used but the Vice President of Finance thinks that straight line depreciation would be better because the tax rate is expected to increase substantially over the next few years. In the first year of the life of the investment the tax rate is expected to be 20%, in the second year 25% and 30 % thereafter. The firm’s cost of capital is 4.75%. Calculate the NPV of the investment using both the straight line and SYD depreciation methods. Discuss the results. (8 points)

Expert Solution

Solution :-

Dep Per year as per SOYD method

Year	Dep Share	Cost	Dep Charge
1	4/10	105,700	42,280
2	3/10	105,700	31,710
3	2/10	105,700	21,140
4	1/10	105,700	10,570

10			105700

Dep per year as per straight line method = $105,700 / 4 = $ 26,425

Choose the method of Straight line as with this method the NPV is higher

jeff jeffy answered 2 years ago

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