Question

Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $800,000 of equipment. The company could use either 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 33.33%, 44.45%, 14.81%, and 7.41%. The company's WACC is 10%, and its tax rate is 35%.

What would the depreciation expense be each year under each method? Year Scenario 1 (Straight Line) Scenario 2 (MACRS)

Year1 $

Year 2 $

Year 3 $

Year 4 $

Which depreciation method would produce the higher NPV?

How much higher would it be? Round your answer to the nearest dollar. $

Answer 1