Question

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 = __________

Answer 1