Wendy is evaluationg a capital budgeting project that should last for 4 years. The project requires $800,000 of equipment. She is unsure what Depreciation method 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 evenly over its 4 year life (ignore the half-year convention for the straight line method). The applicable MACRS depreciation rates are 33%, 45%, 15% and 7%. The companys WACC is 10% and its tax rate is 40%.
What would be the derpciation expense be each year under each method?
Which depreciation method would producte the higher NPV, and how much higher would it be?