Problem 11-5 Depreciation Methods

Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $800,000 of equipment. The company could use either 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%. The company's WACC is 9%, and its tax rate is 50%.

What would the depreciation expense be each year under each method?

Year	Scenario 1 (Straight Line)	Scenario 2 (MACRS)
1	$	$
2	$	$
3	$	$
4	$	$

Which depreciation method would produce the higher NPV? -Select-Scenario 1Scenario 2Item 9 How much higher would it be? Round your answer to the nearest dollar. $

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Problem 11-6 New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,180,000, and it would cost another $18,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $584,000. The machine would require an increase in net working capital (inventory) of $8,500. The sprayer would not change revenues, but it is expected to save the firm $440,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

What is the Year-0 net cash flow? $

What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.

Year 1	$
Year 2	$
Year 3	$

What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar. $

If the project's cost of capital is 14 %, what is the NPV of the project? Round your answer to the nearest dollar. $

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Problem 11-7 New-Project Analysis

The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firms R&D department The equipment's basic price is $100,000, and it would cost another $15,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $45,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $5,000. The machine would have no effect on revenues, but it is expected to save the firm $40,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 35%.

What is the Year-0 net cash flow? If the answer is negative, use minus sign. $

What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.

Year 1	$
Year 2	$
Year 3	$

What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar. $