Question
Wendys boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier ears and
Wendys boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier ears and give him a larger bonus. The project will last 4 years and requires $1,700,000 of equipment. The company could use either straight line or the 3- year MACRS accelerated method. Under straight-line deprecation, the cost of the equipment would be depreciated evenly over its 4-year life. The applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%, as discussed in appendix 11A. The project cost of capital is 10%, and its tax rate is 40%.
a.What would the depreciation expense be each year under each method?
b.Which deprecation method would produce the higher NPV, and how much higher would it be?
c.Why might Wendys boss prefer straight-line depreciation?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started