Question

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $125,000 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 9%, and its tax rate is 25%.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)0 $ $1 $ $2 $ $3 $ $4 $ $Which depreciation method would produce the higher NPV?-Select-Straight-LineBonus DepreciationItem 11How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar.$

Answer 1

Under the straight-line method, the depreciation expense would be $31,250 for each year. Under the bonus depreciation method, the depreciation expense would be $125,000 in the first year and $0 for the subsequent years. To determine the higher NPV and the difference between the NPVs, we would need to calculate the NPVs for each scenario.

Step-by-step explanation:

To calculate the depreciation expense for each year under each method, we need to understand the difference between straight-line depreciation and bonus depreciation.

Under straight-line depreciation, the cost of the equipment is evenly depreciated over its 4-year life. So, the depreciation expense would be $125,000 / 4 = $31,250 for each year.

On the other hand, with bonus depreciation, the entire cost of the equipment can be immediately expensed in the first year. Therefore, the depreciation expense would be $125,000 in the first year and $0 for the subsequent years.

To determine which depreciation method would produce the higher NPV, we need to calculate the NPV for each scenario, using the WACC and tax rate given. Once we have the NPV for both scenarios, we can compare them to determine which one is higher.

As for the question of how much higher the NPV would be under the preferred method, we would need the NPVs calculated for both scenarios to calculate the difference between them.