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Studying the Effect of the Depreciation Method on NPV

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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 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 MARCS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. 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?

That is the question I am working on. What I am having trouble with is part b.

- Why might Wend's boss prefer straight line depreciation?

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Solution Summary

This solution studies the effect of the depreciation method used on the NPV of a project. The solution is provided within an Excel document which is attached.

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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