Question1. Kristin is computing a capital budgeting project that must previous 4 years. The project needs $625,000 of equipment. She is unsure what depreciation technique to use in her analysis, straight-line or the 3-year MACRS accelerated technique. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its four year life. (Ignore the half-year for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, 7% as discussed in Appendix 12A. The company's WACC is 14%, and its tax rate is 40%.
a. What would the depreciation expenditure be each year under each technique?
b. Which depreciation technique would produce the higher NPV and how much higher would it be?
Question2. Mississippi River Shipyards is considering replacing an eight year-old riveting machine with a new one that will raise earnings before depreciation from $24,000 to $44,000 per year. The new machine will cost $82,500 and it will have estimated life of eight years and no salvage value. The new machine will be depreciated over its five year MACRS recovery period; so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11% and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 14%. The old machine has been completely depreciated and has no salvage value. Must the old riveting machine be replaced by the new one? Describe your answer. (Hint: use NPV)
Question3. The equipment originally cost 23 million, of which 75% has been depreciated. Kennedy can sell the employed equipment today for $5.75 million, and its tax rate is 35%. What is equipment's after-tax net salvage value?