Charlene is evaluating a capital budgeting project that shouldlast for 4 years. The project requires $800,000 of equipment. She is unsure what depreciationmethod 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 evenlyover its 4-year life (ignore the half-year convention for the straight-line method). The applicableMACRS depreciation rates are 33%, 45%, 15%, and 7%, as discussed in Appendix 12A.The company’s WACC is 8%, and its tax rate is 35%.a. What would the depreciation expense be each year under each method?b. Which depreciation method would produce the higher NPV, and how much higherwould it be?

Charlene is evaluating a capital budgeting project that shouldlast for 4 years. The project requires $800,000 of equipment. She is unsure what depreciationmethod 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 evenlyover its 4-year life (ignore the half-year convention for the straight-line method). The applicableMACRS depreciation rates are 33%, 45%, 15%, and 7%, as discussed in Appendix 12A.The company’s WACC is 8%, and its tax rate is 35%.a. What would the depreciation expense be each year under each method?b. Which depreciation method would produce the higher NPV, and how much higherwould it be?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 28P: Friedman Company is considering installing a new IT system. The cost of the new system is estimated...

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