13-5 Depreciation Methods Wendy%u2019s boss wants to use straight-line depr

13-5 Depreciation Methods

Wendy%u2019s 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 $1700000 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 33.3% 44.45% 14.81% and 7.41% as discussed in Appendix 13A.
The company%u2019s 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?

c.Why might Wendy%u2019s boss prefer straight-line depreciation?