close solutoin list

DEPRECIATION METHODS Charlene 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 8%, and its tax rate is 35%. 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?

BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

Solutions

Chapter
Section
Chapter 12, Problem 6P
Textbook Problem

DEPRECIATION METHODS Charlene 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 8%, and its tax rate is 35%.

  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?

Expert Solution

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

See Solution

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Chapter 12 Solutions

Fundamentals of Financial Management (MindTap Course List)
Show fewer chapter solutions
Ch. 12 - Operating cash flows rather than accounting income...Ch. 12 - Explain why sunk costs should not be included in a...Ch. 12 - Explain why net operating working capital is...Ch. 12 - Why are interest charges not deducted when a...Ch. 12 - Most firms generate cash inflows every day, not...Ch. 12 - What are some differences in the analysis for a...Ch. 12 - Distinguish among beta (or market) risk,...Ch. 12 - In theory, market risk should be the only relevant...Ch. 12 - Define (a) sensitivity analysis, (b) scenario...Ch. 12 - If you were the CFO of a company that had to...Ch. 12 - What is a "replacement chain"? When and how should...Ch. 12 - What is an "equivalent annual annuity (EAA)"? When...Ch. 12 - Suppose a firm is considering two mutually...Ch. 12 - REQUIRED INVESTMENT Tannen Industries is...Ch. 12 - PROJECT CASH FLOW Colsen Communications is trying...Ch. 12 - AFTER-TAX SALVAGE VALUE Karsted Air Services is...Ch. 12 - REPLACEMENT ANALYSIS The Oviedo Company is...Ch. 12 - EQUIVALENT ANNUAL ANNUITY Faleye Consulting is...Ch. 12 - DEPRECIATION METHODS Charlene is evaluating a...Ch. 12 - SCENARIO ANALYSIS Huang Industries is considering...Ch. 12 - NEW PROJECT ANALYSIS You must evaluate the...Ch. 12 - NEW PROJECT ANALYSIS You must evaluate a proposal...Ch. 12 - REPLACEMENT ANALYSIS The Dauten Toy Corporation...Ch. 12 - REPLACEMENT ANALYSIS St. Johns River Shipyards is...Ch. 12 - PROJECT RISK ANALYSIS The Butler-Perkins Company...Ch. 12 - UNEQUAL LIVES Crockett Graphic Designs Inc. is...Ch. 12 - UNEQUAL LIVES Overton Clothes Inc. is considering...Ch. 12 - REPLACEMENT CHAIN Rini Airlines is considering two...Ch. 12 - REPLACEMENT CHAIN The Lesseig Company has an...Ch. 12 - EQUIVALENT ANNUAL ANNUITY A firm has two mutually...Ch. 12 - SCENARIO ANALYSIS Your firm, Agrico Products, is...Ch. 12 - NEW PROJECT ANALYSIS Holmes Manufacturing is...Ch. 12 - REPLACEMENT ANALYSIS The Darlington Equipment...Ch. 12 - REPLACEMENT ANALYSIS The Bigbee Bottling Company...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions
How do firms forecast the demand for human resources?

Foundations of Business (MindTap Course List)

Why should policymakers think about incentives?

Essentials of Economics (MindTap Course List)

Describe marketing uses of branding

MKTG 12:STUDENT ED.-TEXT

Suppose the population of Area Y is relatively young, and the population of Area O is relatively old, but every...

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

Explain the real balance effect.

Economics (MindTap Course List)