Question: Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $600,000 of equipment. The company could use either 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 33.33%, 44.45%, 14.81%, and 7.41%. The company's WACC is 8%, and its tax rate is 30%.
a. What would the depreciation expense be each year under each method?
|
Year
|
Scenario 1
(Straight Line)
|
Scenario 2
(MACRS)
|
|
1
|
$
|
$
|
|
2
|
$
|
$
|
|
3
|
$
|
$
|
|
4
|
$
|
$
|
b. Which depreciation method would produce the higher NPV? How much higher would it be? Round your answer to the nearest dollar.