DEPRECIATION METHODS Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $800,000 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% as discussed in Appendix 12A. The company’s WACC is 10%, and its tax rate is 40%. 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?

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Fundamentals of Financial Manageme...

8th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285065137
BuyFind

Fundamentals of Financial Manageme...

8th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285065137

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Chapter
Section
Chapter 12, Problem 6P
Textbook Problem

DEPRECIATION METHODS Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $800,000 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% as discussed in Appendix 12A. The company’s WACC is 10%, and its tax rate is 40%.

  1. a. What would the depreciation expense be each year under each method?
  2. b. Which depreciation method would produce the higher NPV, and how much higher would it be?

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Chapter 12 Solutions

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

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