Problem 12-6 Depreciation methods Kristin is evaluating a capital budgeting proj
ID: 2764443 • Letter: P
Question
Problem 12-6
Depreciation methods
Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $125,000 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 11%, and its tax rate is 30%.
What would the depreciation expense be each year under each method? Round your answers to the nearest cent.
Which depreciation method would produce the higher NPV?
-Select-Straight-LineMACRSItem 9
How much higher would the NPV be under the preferred method? Round your answer to two decimal places.
$
(Straight-Line) Scenario 2
(MACRS) 1 $ $ 2 $ $ 3 $ $ 4 $ $
Explanation / Answer
Differnce in dpreiction year wise
Higher the depreciation and hence second method is better
Tax* Depreciation =0.4*Depreciation
And calculate the NPV
Sumamrize
Year Scenario 1 Scenario 2 1 31250 41250 2 31250 56250 3 31250 18750 4 31250 8750