Answered: Charlene is evaluating a capital…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 28P: Friedman Company is considering installing a new IT system. The cost of the new system is estimated...

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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 8%, and its tax rate is 30%.

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? Straight-Line or Bonus Depreciation

How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar.
$

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Year	Scenario 1 (Straight-Line)	Scenario 2 (Bonus Depreciation)
0	$	$
1	$	$
2	$	$
3	$	$
4	$	$