5. (Depreciation) You are considering the following investment: B O CD 1 2 3,000 3.000 E 3 3.000 F G 4 5 2,500 2,500 H 6 2,500 1 7 2,500 A 3 Year 4 Earnings before depreciation and taxes 5 Depreciation 6 Eamings before taxes 7 Tax (34%) 8 Net operating profit after tax 9 Capital investment (no salvage value) 10 Add back depreciation 11 Free cash flow 12 13 Discount rate 14 NPV -10,500 11% 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: A 17 Year 18 MACRS depreciation B O C D F 1 2 3 4 14.29% 24.49% 17.49% 12,49% G 5 8.93% H 6 8.93% 7 8.93% J 8 4.4596 Ch 6 05 DEPRECIATION SCHEDULE 0 1 3,000 2 3,000 3 3,000 4 2,500 5 2,500 6 2,500 7 2,500 - 10,500 0 Section a, straight line depreciation Year Earnings before depreciation and taxes 6 Depreciation Earnings before taxes & Tax (34%) 9 Net operating profit after tax 10 Capital investment no salvage value) 11 Add back depreciation 12 Free cash flow 13 16 Discount rate 15 NPV 16 17 Section b. MACRS depreciation 18 Year 19 MACRS depreciation 20 Earnings before depreciation and taxes 21 Depreciation 22 Earnings before taxes 23 Tax (34%) 24 Net operating profit after tax 25 Capital investment (no salvage value) 26 Add back depreciation 27 Free cash flow 28 29 Discount rate 30 NPV 0 1 14.29% 3.000 2 24 49% 3,000 3 17.49% 3.000 4 12.49% 2.500 5 8.93% 2.500 6 8,93% 2,500 7 8.93% 2,500 8 4,45% 0 467 -10,500 0 11%