A. Phyllis thinks that firm must utilize straight-line depreciation for capital project as it results in higher net income during early years of project's life. Joanna thinks that firm must use modified accelerated cost recovery system depreciation as it decreases tax liability during early years of project's life. Suppose you have choice between depreciation methods, whose advice must you follow? Explain why?
B. Depreciation gives a sort of shield against taxes. If there were no taxes, there would be no depreciation tax shields. Does this mean that project's NPV would be less if there were no taxes?
C. Total present value of all costs related with asset over seven-year life is $73,285. If asset has cost of capital of 11%, determine the EAC of using this asset?