Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $775,000
Question:
Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $775,000 of equipment and is eligible for 100% bonus depreciation. She is unsure whether immediately expensing the equipment or using straight-line depreciation is better for the analysis. 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 company's WACC is 9%, and its tax rate is 25%.
a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Round your answers to the nearest dollar.
Year | Scenario 1 (Straight-Line) | Scenario 2 (Bonus Depreciation) |
0 | $ | $ |
1 | $ | $ |
2 | $ | $ |
3 | $ | $ |
4 | $ | $ |
b. Which depreciation method would produce the higher NPV?
-Select-Straight-Line/Bonus DepreciationItem
How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham