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 $900,000 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 33.33%, 44.45%, 14.81%, and 7.41%. The company's WACC is 9%, and its tax rate is 50%. What would the depreciation expense be each year under each method? Year Scenario 1 (Straight Line) Scenario 2 (MACRS)
Which depreciation method would produce the higher NPV?
How much higher would it be? Round your answer to the nearest dollar.
Why might Wendy's boss prefer straight-line depreciation?