Question
Charlene is evaluating a capital budgeting project that should last 4 years. The project requires $550,000 of equipment and is eligible for 100% bonus depreciation.
Charlene is evaluating a capital budgeting project that should last 4 years. The project requires $550,000 of equipment and is eligible for 100% bonus depreciation. She is unsure whether immediately expensing the equipment or using straight -line deprecation is better for the analysis. Under straight-line depreciation, the cost of the equipment would be depriated evenly over its 4-year life (ignore the half-year convention for the straight -line method). The companys WACC is 8%, and its tax rate is 20%.
a. What would the depreciation expense be each year under each method? (Positive values)
b. Which depreciation method would produce the higher NPV?
c. How much higher would the NPV be under the preferred method? Do not round calcuations
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