DEPRECIATION METHODS
Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $900,000 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 14%, and its tax rate is 35%.
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 | __________ | ____________ |
Which depreciation method would produce the higher NPV?
-MACRS
How much higher would the NPV be under the preferred method? Round
your answer to two decimal places. Do not round your intermediate
calculations.
$ ____________
PROJECT RISK ANALYSIS
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $7,000 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions:
Project A | Project B | |||
Probability | Cash Flows | Probability | Cash Flows | |
0.2 | $6,500 | 0.2 | $0 | |
0.6 | 7,000 | 0.6 | 7,000 | |
0.2 | 7,500 | 0.2 | 18,000 |
BPC has decided to evaluate the riskier project at 12% and the less-risky project at 9%.
What is each project's expected annual cash flow? Round your answers to two decimal places.
Project A $ __________
Project B $ __________
Project B's standard deviation (σB) is $5,776 and its coefficient of variation (CVB) is 0.74. What are the values of (σA) and (CVA)? Round your answer to two decimal places.
σA = $ _________
CVA = __________
Get Answers For Free
Most questions answered within 1 hours.