Your company could use either straight line depreciation or the 3-year MACRS accelerated depreciation method. Discuss why a firm might prefer the 3-year MACRS accelerated depreciation method over the straight line depreciation method.

Your company could use either straight line depreciation or the 3-year MACRS accelerated depreciation method. Discuss why a firm might prefer the 3-year MACRS accelerated depreciation method over the straight line depreciation method.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 8QTD

See similar textbooks

Similar questions

Why do you think the 150% DB method is used as thebasis for depreciation for 15-year and 20-year classes ofequipment?
Which of the following will maximize net income by minimizing depreciation expense in the first year of the asset’s life? a. Short service life, high residual value, and straightline depreciation.b. Long service life, high residual value, and straightline depreciation.c. Short service life, low residual value, and doubledeclining- balance depreciation.d. Long service life, high residual value, and doubledeclining- balance depreciation.
What issue can occur in your model if the useful life of the new fixed assets is less than the remaining years in the forecast period?\\n\\nA. You can under depreciate the fixed assets\\n\\nB. You can over depreciate the fixed assets\\n\\nC. You will no longer be able to use a waterfall structure for your depreciation schedule
The following two statements concern depreciation: 1. Because our plant was shut down for part of the year, we will not depreciate it. Depreciating it for the full year would increase our costs and overstate the inventory. 2. I think we should have increasing depreciation expense each period because it will increase the funds recovered near the end of the assets life when maintenance costs are high and we will need to replace the asset. Also, I think tax rates will be higher toward the end of the assets life, so we will be better off to have a larger amount of depreciation expense then. Required: Prepare a short report that evaluates each of the following statements separately.
Wendys 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 1,700,000 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%, as discussed in Appendix 11A. The project cost of capital is 10%, and its tax rate is 25%. a. What would the depreciation expense be each year under each method? b. Which depreciation method would produce the higher NPV, and how much higher would it be? c. Why might Wendys boss prefer straight-line depreciation?
In the System, if you sell an asset that belongs to a particular class that faces a depreciation recapture penalty, which of the following could never happen simultaneously A Capital Gains Tax B Purchase Price< Salvage Value C Salvage Value >UCC D Loss on disposal Determine the discounted payback period of a project that requires an investment of $7, 500 today, an investment of $3, 500 next year, and then generates cash flows of $9,000 in every subsequent year. Assume a discount rate of 12.0% A 2.54 years B 1.46 years C 1.22 years D 1.54 years E 1.61 years
Juan Martinez, CFO of VIRMIN, S.A., is selecting the depreciation method to use fora new machine. Th e machine has an expected useful life of six years. Production is expected to be relatively low initially but to increase over time. Th e method chosen for taxreporting must be the same as the method used for financial reporting. If Martinez wantsto minimize tax payments in the first year of the machine’s life, which of the followingdepreciation methods is Martinez most likely to use?A. Straight-line methodB. Units-of-production methodC. Double-declining balance method
A business purchasing an item for business purposes may use straight-line depreciation to obtain a tax deduction. The formula for the present value, P, after t years is P = C − C − s L t where C is the cost and s is the scrap value after L years. The number L is called the useful life of the item. (a) If a certain piece of equipment costs $15,000 and has a scrap value of $1,700 after 5 years, write an equation to represent the present value after t years.
Which one of the following would correctly describe the net realisable value of a two year old asset? Select one alternative The original cost of the asset less two years' depreciation The cost of an equivalent new asset less two years' depreciation The amount that could be obtained from selling the asset, less any costs of disposal The present value of the future cash flows obtainable from continuing to use the asset
The straight-line depreciation method and the double-declining-balance depreciation method: Group of answer choices Produce the same depreciation expense each year. Produce the same total depreciation over an asset's useful life. Produce the same book value each year. Are the only acceptable methods for calculating depreciation expense.
Mariam is analyzing a project and has gathered the following data. The firm depreciates its assets using straight-line depreciation to a zero book value over the life of the asset. Required rate of return on this project is 10% Year Cash Flow Net Income 0 -$642,000 n/a 1 170,000 $9,500 2 240,000 79,500 3 $270,000 $85,500 a.What is the payback period for this project? b. What is the discounted payback period? c. What is the projects average accounting rate of return (AAR)? d. What is the NPV for this project? e. What is the profitability index for this project? f. Based on your answers in a) through e), which project will you finally choose?
At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Johnson Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $1,200,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 0. • The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). • The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. • Replacing the old machine will require an investment in net operating working capital (NOWC) of…