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

90.2K

Verified Solution

Question

Finance

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 $1,730,000 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 10%, and its tax rate is 25%.
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 $Â Â $Â Â
2 $Â Â $Â Â
3 $Â Â $Â Â
4 $Â Â $Â Â
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 1Scenario 2Item 9 will be higherby $Â Â Â .

Answer & Explanation Solved by verified expert

4.4 Ratings (747 Votes)

a The depreciation expense under both methods are computed below Year Scenario 1 Straight Line Computation Scenario 1 Straight Line Scenario 2 MACRS Computation Scenario 2 MACRS 1 1730000 4 432500 1730000 x 3333 576609 2 1730000 4 432500 1730000 x 4445 768985 3 1730000 4 432500 1730000 x See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

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