Robert is evaluating a project that is expected to last for 4 years. The beginning of the project includes a purchase of 1,000,000 a piece of equipment that is expected to have zero salvage value. We want to decide which depreciation method will be advantageous for the firm. It is either 100% bonus depreciation or the 3-year MACRS accelerated method. Both methods are allowed by the Tax Cuts and Jobs Act through 2022. 100% bonus depreciation results in the cost of the equipment being depreciated entirely in the first year after purchase. The 3-year MACRS rates are 33, 45, 15 and 7 percentages in years 1,2,3, and respectively. Robert is using the discount rate of 7% with the tax rate of 25%.

a. Under each scenario, what would the depreciation expense be for each year?

b. Everything else held constant, which depreciation method results in a higher NPV for the project and by how much?