As a new actuary, you are reviewing a project analysis done by another actuary at your firm.. Although the first actuary calculated a project NPV, you discover a mistake in the analysis: You notice that the analyst depreciated the purchase price of a $3 billion asset straight line down to a salvage value of zero over the four years. The marginal tax rate is 25%. However, The US law now will allow treating this investment as a tax deductible expense in the year of purchase.

Calculate the effect on the net present value of the project of expensing the asset at t=0, rather than depreciating it over the 4 years. Be sure to indicate if the change in NPV is positive or negative. In other words, did the mistake made by the first actuary cause the NPV to be higher or lower than it should be and by how much.

Interest is 8%.