Depreciation Methods Wendy's boss wants to use straight-line depreciation for the new expansion project because he said...

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Finance

Depreciation Methods
Wendy's boss wants to use straight-line depreciation for the newexpansion project because he said it will give higher net income inearlier years and give him a larger bonus. The project will last 4years and requires $1,680,000 of equipment. The company could useeither straight-line or the 3-year MACRS accelerated method. Understraight-line depreciation, the cost of the equipment would bedepreciated evenly over its 4-year life. (Ignore the half-yearconvention for the straight-line method.) The applicable MACRSdepreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. Theproject cost of capital is 8%, and its tax rate is 40%.
What would the depreciation expense be each year under eachmethod? Enter your answers as positive values. Do not roundintermediate calculations. Round your answers to the nearestdollar.

Year Scenario 1
(Straight Line) Scenario 2
(MACRS)
1 $   $
2 $   $
3 $   $
4 $   $
Which depreciation method would produce the higher NPV, and howmuch higher would it be? Do not round intermediate calculations.Round your answer to the nearest cent.
The NPV under -Select: (Scenario 1, Scenario) will be higher by$   .

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3.6 Ratings (414 Votes)

SLM					8%
Year	Cost	Dep rate	Depreciation	Tax saving @ 40%	PV factor	PV
1	1,680,000	25%	420,000	168,000.00	0.925926	155,555.56
2	1,680,000	25%	420,000	168,000.00	0.857339	144,032.92
3	1,680,000	25%	420,000	168,000.00	0.793832	133,363.82
4	1,680,000	25%	420,000	168,000.00	0.73503	123,485.02
					Total PV	556,437.31

MACARS					8%
Year	Cost	Dep rate	Depreciation	Tax saving @ 40%	PV factor	PV
1	1,680,000	33.33%	559,944	223,977.60	0.925926	207,386.67
2	1,680,000	44.45%	746,760	298,704.00	0.857339	256,090.53
3	1,680,000	14.81%	248,808	99,523.20	0.793832	79,004.72
4	1,680,000	7.41%	124,488	49,795.20	0.73503	36,600.96
					Total PV	579,082.89

As we can see the PV of tax saving on MACARS is higher

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Transcribed Image Text

Depreciation MethodsWendy's boss wants to use straight-line depreciation for the newexpansion project because he said it will give higher net income inearlier years and give him a larger bonus. The project will last 4years and requires $1,680,000 of equipment. The company could useeither straight-line or the 3-year MACRS accelerated method. Understraight-line depreciation, the cost of the equipment would bedepreciated evenly over its 4-year life. (Ignore the half-yearconvention for the straight-line method.) The applicable MACRSdepreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. Theproject cost of capital is 8%, and its tax rate is 40%.What would the depreciation expense be each year under eachmethod? Enter your answers as positive values. Do not roundintermediate calculations. Round your answers to the nearestdollar.YearScenario 1(Straight Line)Scenario 2(MACRS)1$ $ 2$ $ 3$ $ 4$ $ Which depreciation method would produce the higher NPV, and howmuch higher would it be? Do not round intermediate calculations.Round your answer to the nearest cent.The NPV under -Select: (Scenario 1, Scenario) will be higher by$ .

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