Question
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
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 $1,760,000 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 project cost of capital is 9%, and its tax rate is 30%.
- What would the depreciation expense be each year under each method? Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.
- YearScenario 1
- (Straight Line)Scenario 2
- (MACRS)1$$2$$3$$4$$
- Which depreciation method would produce the higher NPV, and how much higher would it be? Do not round intermediate calculations. Round your answer to the nearest cent.
- The NPV under-Select-
- Scenario 1
- Scenario 2
- Item 9
- will be higher by $.
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