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Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it...

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Finance

Wendy's boss wants to use straight-line depreciation for the newexpansion project because he said it will give higher net income inearlier years and give him a larger bonus. The project will last 4years and requires $1,770,000 of equipment. The company could useeither straight-line or the 3-year MACRS accelerated method. Understraight-line depreciation, the cost of the equipment would bedepreciated evenly over its 4-year life. (Ignore the half-yearconvention for the straight-line method.) The applicable MACRSdepreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. Theproject cost of capital is 8%, and its tax rate is 25%.

  1. What would the depreciation expense be each year under eachmethod? Enter your answers as positive values. Do not roundintermediate calculations. Round your answers to the nearestdollar.


Year		Scenario 1
(Straight Line)		Scenario 2
(MACRS)
1$  $  
2$  $  
3$  $  
4$  $  

Which depreciation method would produce the higher NPV, and howmuch higher would it be? Do not round intermediate calculations.Round your answer to the nearest cent.

The NPV under -Select-Scenario 1Scenario 2 will be higher by$   .

Answer & Explanation Solved by verified expert
4.2 Ratings (795 Votes)
The NPV under Scenario 2 will be higher by    See Answer
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