A financial analyst has computed both accounting and NPV breakeven sales levels for a project using straight-line depreciation over a 6-year period. The project manager wants to know what will happen to these estimates if the firm uses MACRS depreciation instead. The capital investment will be in a 5-year recovery-period class under MACRS rules (see Table 9.2). The firm is in a 35% tax bracket. (LOWS)
a. Would the accounting break-even level of sales in the first years of the project increase or decrease?
b. Would the NPV break-even level of sales in the first years of the project increase or decrease?
c. If you were advising the analyst, would the answer to (a) or (b) be important to you? Specifically, would you say that the switch to MACRS makes the project more or less attractive?