Depreciation Methods
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Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $800,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under that straight-line depreciation, the cost of the equipment would be depreciated over its 4-year life (ignore the half year convention for stright line method). The applicable MACRS depreciation rates are 33,45,15 and 7 percent. The company's WACC is 10% and its tax rate is40%.
a)What would be 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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Solution Summary
The solution explains the calculation of depreciation expense under different methods and the impact on NPV of the project.
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a. What would the depreciation expense be each year under each method?
Under the straight line method
Depreciation expense = 800,000/4=200,000 per year
Under the MACRS depreciation, the depreciation ...
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