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Katherine is evaluating a capital budgeting project that should last for 4 years. The project requires $700,000 of equipment. She is unsure what depreciation method to use in her analysis, 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, 45, 15 and 7 percent as discussed in Appendix 12A. The company’s required return on capital is 10 percent and its tax rate is 40 percent.Which depreciation method would produce the higher NPV, and how much higher would it be?
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