(Depreciation) You are considering the following investment:

a. Assuming that the investment can be depreciated using 7-year straight-line depreciation with no salvage value, calculate the project NPV.

b. What will be the company’s gain in present value if it uses a 7-year modified accelerated depreciation (MACRS) schedule, given below:

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B CDE F 0 1 2 3 4 3,000 3,000 3,000 2,500 3 Year 4 A Earnings before depreciation and taxes 5 Depreciation 6 Earnings before taxes 7 Tax (34%) 8 Net operating profit after tax 9 Capital investment (no salvage value) -10,500 10 Add back depreciation 11 Free cash flow 12 13 Discount rate 11% 14 NPV G H 5 6 7 2,500 2,500 2,500 0