endy's boss wants to use straight-line depreciation for the new expansion project because he said it...

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endy'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 $700,000 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 50%. What wouldthe depreciation expense be each year under each method? YearScenario 1 (Straight Line) Scenario 2 (MACRS) 1 $ $ 2 3 4 Whichdepreciation method would produce the higher NPV? How much higherwould it be? Round your answer to the nearest dollar.

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4.2 Ratings (599 Votes)

STRAIGHT LINE DEPRECIATION:
Year	Depreciation expense	Tax shield on depreciation	PVIF at 8%	PV at 8%
1	$ 1,75,000	$ 87,500	0.92593	$ 81,019
2	$ 1,75,000	$ 87,500	0.85734	$ 75,017
3	$ 1,75,000	$ 87,500	0.79383	$ 69,460
4	$ 1,75,000	$ 87,500	0.73503	$ 64,315
				$ 2,89,811
MACRS DEPRECIATION:
Year	Depreciation expense	Tax shield on depreciation	PVIF at 8%	PV at 8%
1	$ 2,33,310	$ 1,16,655	0.92593	$ 1,08,014
2	$ 3,11,150	$ 1,55,575	0.85734	$ 1,33,380
3	$ 1,03,670	$ 51,835	0.79383	$ 41,148
4	$ 51,870	$ 25,935	0.73503	$ 19,063
				$ 3,01,606
As the PV of the depreciation tax shield is more under the MACRS
method, it will produce higher NPV.
The NPV would be higher by 301606-289811 =			$ 11,795

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endy'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 $700,000 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 50%. What wouldthe depreciation expense be each year under each method? YearScenario 1 (Straight Line) Scenario 2 (MACRS) 1 $ $ 2 3 4 Whichdepreciation method would produce the higher NPV? How much higherwould it be? Round your answer to the nearest dollar.