Use straight-line depreciation for the expansion project

Assignment Help Financial Management

Reference no: EM131625262

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 1,700,000 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% as discussed in Appendix 11A. The cost of capital is 10% and its tax rate is 40%. Answer in Excel.

What would the depreciation expense be each year under each method?

Which depreciation method would produce the higher NPV, and how much higher would it be?

Why might Wendy’s boss prefer straight-line depreciation?

Reference no: EM131625262

Questions Cloud

Labor savings and depreciation tax savings : would also last for 10 years and would produce after tax flows (labor savings and depreciation tax savings) of $19,000 per year.

What is the additional cash flow in year three : What is the Year-0 net cash flow? What is the additional (nonoperating) cash flow in year 3?

Annual social cost of the fossil fuel the solar system : Suppose we determine that the annual social cost of the fossil fuel the solar system displaces is 40% of its market price.

How much does the baseball team need to deposit : If the interest rate is 4.7% compounded annually, how much does the baseball team need to deposit in year 0 in order to fully fund this contract?

Use straight-line depreciation for the expansion project : What would the depreciation expense be each year under each method? Why might Wendy’s boss prefer straight-line depreciation?

Exhibit low correlations of return with overall stock market : Identify at least one type of firm that might exhibit low correlations of returns with the overall stock market?

Type of an application to be consider for approval : Briefly but clearly explain six general Requirement you need for such type of an application to be consider for approval.

Underline the environment within which a bank customer : There are various models and techniques, which one can be use to underline the environment within which a bank customer can operate.

Calculate the debt and coverage ratios for the two companies : Calculate the following debt and coverage ratios for the two companies. Calculate the following profitability ratios for the two companies.

User Account

All Pages