Question

DEPRECIATION METHODS

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $675,000 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 13%, and its tax rate is 30%.

1. What would the depreciation expense be each year under each method? Round your answers to the nearest cent.
   

   Year	Scenario 1 (Straight-Line)	Scenario 2 (MACRS)
   1	$	$
   2
   3
   4

2. Which depreciation method would produce the higher NPV?
   =STRAIGHT LINE OR MACRS?
   
3. How much higher would the NPV be under the preferred method? Round your answer to two decimal places. Do not round your intermediate calculations.
   $_____?

Answer 1