Question

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $125,000 of equipment and is eligible for 100% bonus depreciation. She is unsure whether immediately expensing the equipment or using straight-line depreciation is better for the analysis. 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 company's WACC is 10%, and its tax rate is 20%.

1. What would the depreciation expense be each year under each method? Enter your answers as positive values. Round your answers to the nearest dollar.
   

   Year	Scenario 1 (Straight-Line)	Scenario 2 (Bonus Depreciation)
   0	$	$
   1	$	$
   2	$	$
   3	$	$
   4	$	$

2. 
   
3. Which depreciation method would produce the higher NPV?
   -Select-Straight-Line?   Bonus Depreciation?
4. How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar.   $ ----------?

Answer 1

Answer (a)

The depreciation under various scenarios are as under

Answer (B)

Straight Line method of Depreciation will produce higher NPV as under;-

Answer to (c)

Under Straight Line method (Preferred method), the NPV would be higher by $ 2915