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Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $375,000 of equipment. She is unsure what depreciation method
Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $375,000 of equipment. She is unsure what depreciation method to use in her 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%, 45%, 15%, and 7%. The company's WACC is 12%, and its tax rate is 35%.
| Year | Scenario 1 (Straight-Line) | Scenario 2 (MACRS) |
| 1 | $93,750 | $123,750 |
| 2 | $93,750 | $168,750 |
| 3 | $93,750 | $56,250 |
| 4 | $93,750 | $26,250 |
- Which depreciation method would produce the higher NPV? (straight-line or MACRS) How much higher would the NPV be under the preferred method? Round your answer to two decimal places. $_______
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