The primary disadvantage to using 100% Bonus Depreciation rather than straight-line depreciation when computing taxable income for a project is that with 100% Bonus Depreciation the present value of the tax savings provided by depreciation will be lower, other things held constant.

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Question 88 pts

Langston Labs has an overall company WACC of 10%, which reflects the cost of capital for the average project it has invested in. The company is in the process of evaluating several new independent projects and has ranked those projects in terms of project risk and has computed the IRR for each project. The companys Chief Financial Officer has decided to make the decisions on which projects to accept based on whether the computed IRR for a project exceeds the companys WACC of 10%. Project Risk IRR Proj A High 15% Proj B Average 12% Proj C High 11% Proj D Low 9% Proj E Low 6% Will the CFOs decision rule lead to the correct selection of the value maximizing projects (assume the projects are all independent and not mutually exclusive) ?

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