Wendys boss wants to use straight-line depreciation for the new expansion project because he said...
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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 25%.
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?
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