As a financial analyst based in the United States, you have just computed both the accounting and NPV break-even sales levels for a project under consideration. You have used straight line depreciation over a six-year period. Your manager wants you to redo the computation using the Modified Accelerated Cash Recovery System or MACRS. Under the rules, the applicable depreciation rates over years 1 to 6 will be 20, 32, 19.20, 11.52, 11.52 and 5.76. MACRS effectively allows a firm to use higher depreciation rates in the early years.
a. Qualitatively speaking (no calculation needed!), how will a switch to MACRS affect the accounting break-even level of sales in the first years of the project?
b. Qualitatively speaking (no calculation needed!), what will happen to the NPV break-even level of sales?
c. Will the switch to MACRS make the project more or less attractive? Explain.