Question
Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $900,000 of equipment and is eligible for 100% bonus
Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $900,000 of equipment and is eligible for 100% bonus depreciation. She is unsure whether immediately expensing the equipment or using straight-line depreciation is better for the analysis. 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 company's WACC is 11%, and its tax rate is 20%.
a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Round your answers to the nearest dollar.
year | scenario 1 (straight-line) | scenario (bonus depreciation) |
0 | $ | $ |
1 | $ | $ |
2 | $ | $ |
3 | $ | $ |
4 | $ | $ |
b. Which depreciation method would produce the higher NPV? (straight line, bonus depreciation)
How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar. $_____
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started