Question
Depreciation methods:Pleaseshowexcelsheetformulaandresults. Sam is evaluating a capital budgeting project that should last for 4 years. The project requires $700,000 of equipment. He is unsure what
Depreciation methods:Pleaseshowexcelsheetformulaandresults.
Sam is evaluating a capital budgeting project that should last for 4 years. The project requires $700,000 of equipment. He is unsure what depreciation method to use in his analysis, straight-line or the 3-year MACRS accelerated method. 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 applicable MACRS depreciation rates are 33.33, 44.45, 14.81 and 7.41 percent. Assume that both Straight Line and MACRS depreciation expenses begin in year 1 (NOT in year 0).
The company's required return on capital is 10 percent and its tax rate is 40 percent.
a. What would the depreciation expense be each year under each method?
b. Calculate the PV of the depreciation tax shield for both Straight Line and MACRS. Which depreciation method produces the higher value? By how much?
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