Problem:
Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $875,000 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%. The company's WACC is 12%, and its tax rate is 35%.
Required:
Question: How much higher would the NPV be under the preferred method?
Note: Be sure to show how you arrived at your answer.