I included the entire question as it states in my textbook. Could I get some ste
ID: 2668219 • Letter: I
Question
I included the entire question as it states in my textbook. Could I get some step by step help on this question? Thank you so much!12-5 DEPRECIATION METHODS 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 straight-line deprecan, 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% as discussed in Appendix 12A. The company’s WACC is 10%, and its tax rate is 40%.
a. What would 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?
Explanation / Answer
AmandaR : NPV Year 0 Year 1 Year 2 Year 3 Year 4 Method 1: Straight Line (800,000) Depreciation Expense (200,000) (200,000) (200,000) (200,000) Tax effect 80,000 80,000 80,000 80,000 Net Cash Flows (380,384) (120,000) (120,000) (120,000) (120,000) WACC 0.1 AmandaR : Part 2: AmandaR : Method 2: MACRS (800,000) 33% 45% 15% 7% Depreciation Expense (264,000) (360,000) (120,000) (56,000) Tax effect 105,600 144,000 48,000 22,400 Net Cash Flows (399,555) (800,000) (158,400) (216,000) (72,000) (33,600) WACC 0.1 AmandaR : Part 3: AmandaR : Depreciation expense Year 1 Year 2 Year 3 Year 4 Straight Line (200,000) (200,000) (200,000) (200,000) MACRS (264,000) (360,000) (120,000) (56,000) AmandaR : Part 4: AmandaR : NPV Straight Line (380,384) MACRS (399,555) Difference 19,172