5. Problem 12.06

DEPRECIATION METHODS

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $250,000 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%. The company's WACC is 12%, and its tax rate is 35%.

1. What would the depreciation expense be each year under each method? Round your answers to the nearest cent.

   Year	Scenario 1 (Straight-Line)	Scenario 2 (MACRS)
   1	$	$
   2
   3
   4

2. Which depreciation method would produce the higher NPV? (-Select)-Straight-Line, MACRS How much higher would the NPV be under the preferred method? Round your answer to two decimal places. Do not round your intermediate calculations. ----------$?

DEPRECIATION METHODS Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $250,000 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%. The company's WACC is 12%, and its tax rate is 35%. a. What would the depreciation expense be each year under each method? Round your answers to the nearest cent. Year Scenario 1 Scenario 2 (Straight-Line) (MACRS) 1 2 3 4 b. Which depreciation method would produce the higher NPV? -Select- How much higher would the NPV be under the preferred method? Round your answer to two decimal places. Do not round your intermediate calculations