Question

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $225,000 of equipment and is eligible for 100% bonus depreciation. She is unsure whether immediately expensing the equipment or using straight-line depreciation is better for the analysis. 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 company's WACC is 12%, and its tax rate is 30%. a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Round your answers to the nearest dollar. Year Scenario 1 (Straight-Line) $ Scenario 2 (Bonus Depreciation) AWNO b. Which depreciation method would produce the higher NPV? -Select- How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

a.

Year	Scenario 1	Scenario 2
0	$0.00	$0.00
1	$56,250.00	$225,000.00
2	$56,250.00	$0.00
3	$56,250.00	$0.00
4	$56,250.00	$0.00

b.

Year	Scenario 1	Scenario 2	Tax saving scenario 1	Tax saving scenario 2	Discount factor	PV scenario 1	PV scenario 2
0	$0.00	$0.00	0	0	0.12	0	0
1	$56,250.00	$225,000.00	$16,875.00	$67,500.00	0.12	$15,066.96	$60,267.86
2	$56,250.00	$0.00	$16,875.00	$0.00	0.12	$13,452.65	$0.00
3	$56,250.00	$0.00	$16,875.00	$0.00	0.12	$12,011.29	$0.00
4	$56,250.00	$0.00	$16,875.00	$0.00	0.12	$10,724.37	$0.00
NPV						$51,255.27	$60,267.86

100% bonus depreciation has higher NPV.

$9,012.59 higher NPV in 100% bonus depreciaion.