Evaluating capital budgeting project

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Reference no: EM13924775

Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $800,000 of equipment. She is unsure what depreciation method to use in her analysis, striaght-line or the 3-year MACRS accelerated method. Under the striaght-line depreciation, the cost of equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight0line method). The applicable MACRS depreciation rates are 33%, 45%, 15% and 7% as discussed in Appendix 12A. The company's WACC is 10%, and its tax rate is 40%.

a) what would the depreciation expense be each year under each method?

b) which depreciation method would produce the higher NPV, and how much higher would it be?

Reference no: EM13924775

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