Question content area top Part 1 Markov Manufacturing recently spent $16.8 million to purchase some equipment used in th

Post by **answerhappygod** » Thu Apr 28, 2022 12:33 pm

Question content area top
Part 1
Markov Manufacturing recently spent
$16.8
million to purchase some equipment used in the manufacture of
disk drives. The firm expects that this equipment will have a
useful life of five years, and its marginal corporate tax
rate is
21%.
The company plans to use straight-line depreciation.
a. What is the annual depreciation expense associated with
this equipment?
b. What is the annual depreciation tax shield?
c. Rather than straight-line depreciation, suppose Markov
will use the MACRS depreciation method for the five-year life
of the property. Calculate the depreciation tax shield each year
for this equipment under this accelerated depreciation
schedule.
d. If Markov has a choice between straight-line and MACRS
depreciation schedules, and its marginal corporate tax rate
is expected to remain constant, which schedule should
it choose? Why?
e. How might your answer to part
(d)
change if Markov anticipates that its marginal corporate tax
rate will increase substantially over the next
five years?
f. Under the TCJA of 2017, Markov has the option to
take 100% "Bonus" depreciation in the year in which the
equipment is put into use. This means that in that year,
Markov would take the full depreciation expense equivalent to the
cost of buying the equipment. Rather than straight-line
depreciation, suppose Markov will use the bonus depreciation
method. Calculate the depreciation tax shield each year for this
equipment with bonus depreciation.
g. If Markov has a choice between straight-line, MACRS and
bonus depreciation schedules, and its marginal corporate tax
rate is expected to remain constant, which schedule should
it choose? Why?
h. How might your answer to part
(g)
change if Markov anticipates that its marginal corporate tax
rate will increase substantially over the next
five years?
Note:
Assume that the equipment is put into use in year 1.
Question content area bottom
Part 1
a. What is the annual depreciation expense associated with
this equipment?
The annual depreciation expense is
$enter your response here
million. (Round to three decimal places.)
Part 2
b. What is the annual depreciation tax shield?
The annual depreciation tax shield is
$enter your response here
million. (Round to three decimal places.)
Part 3
c. Rather than straight-line depreciation, suppose Markov
will use the MACRS depreciation method for the five-year life
of the property. Calculate the depreciation tax shield each year
for this equipment under this accelerated depreciation
schedule.
The depreciation tax shield for year 1 is
$enter your response here
million. (Round to three decimal places.)
Part 4
The depreciation tax shield for year 2 is
$enter your response here
million. (Round to three decimal places.)
Part 5
The depreciation tax shield for year 3 is
$enter your response here
million. (Round to three decimal places.)
Part 6
The depreciation tax shield for year 4 is
$enter your response here
million. (Round to three decimal places.)
Part 7
The depreciation tax shield for year 5 is
$enter your response here
million. (Round to three decimal places.)
Part 8
The depreciation tax shield for year 6 is
$enter your response here
million. (Round to three decimal places.)
Part 9
d. If Markov has a choice between straight-line and MACRS
depreciation schedules, and its marginal corporate tax rate
is expected to remain constant, which schedule should
it choose? Why? (Select the best choice below.)
A.
The straight-line depreciation is recommended only for
assets that last more than 5 years.
B.
With MACRS, the firm receives the depreciation tax shields
sooner. Thus, MACRS depreciation leads to a higher NPV
of Markov's FCF.
C.
With straight-line depreciation, the firm's
depreciation expenses are lower initially, leading to higher
earnings. Thus, straight-line depreciation leads to a higher
NPV of Markov's FCF.
D.
With either method, the total depreciation tax shield is
the same. Therefore, it does not matter which method is
used.
Part 10
e. How might your answer to part
(d)
change if Markov anticipates that its marginal corporate tax
rate will increase substantially over the next
five years? (Select the best choice below.)
A.
Markov may be better off using the straight-line method if
it expects its tax rate to decrease substantially in later
years.
B.
Even if its tax rate is expected to change, Markov is
better off using MACRS depreciation rather than straight-line
depreciation.
C.
Markov may be better off using the straight-line method if
it expects its tax rate to increase substantially in later
years.
D.The straight-line depreciation is recommended only for
companies whose tax rates are higher than
21%.
Part 11
f. Under the TCJA of 2017, Markov has the option to
take 100% "Bonus" depreciation in the year in which the
equipment is put into use. This means that in that year,
Markov would take the full depreciation expense equivalent to the
cost of buying the equipment. Rather than straight-line
depreciation, suppose Markov will use the bonus depreciation
method. Calculate the depreciation tax shield each year for this
equipment with bonus depreciation.
The depreciation tax shield for year 1 is
$enter your response here
million. (Round to three decimal places.)
Part 12
The depreciation tax shield for years 2-6 is
$enter your response here
million. (Round to three decimal places.)
Part 13
g. If Markov has a choice between straight-line, MACRS and
bonus depreciation schedules, and its marginal corporate tax
rate is expected to remain constant, which schedule should
it choose? Why? (Select the best choice below.)
A.In all cases, its total depreciation tax shield is the
same. But with bonus depreciation, it receives the entire
depreciation tax shield in year
1—thus,
bonus depreciation leads to a higher NPV of Markov's
FCF.
B.In all cases, its total depreciation tax shield is the
same. But with bonus depreciation, it receives the entire
depreciation tax shield in year
3—thus,
bonus depreciation leads to a higher NPV of Markov's
FCF.
C.In all cases, its total depreciation tax shield is the
same. But with bonus depreciation, it receives the entire
depreciation tax shield in year
2—thus,
bonus depreciation leads to a higher NPV of Markov's
FCF.
D.In all cases, its total depreciation tax shield is the
same. But with bonus depreciation, it receives the entire
depreciation tax shield in year
0—thus,
bonus depreciation leads to a higher NPV of Markov's
FCF.
Part 14
h. How might your answer to part
(g)
change if Markov anticipates that its marginal corporate tax
rate will increase substantially over the next
five years? (Select from the drop-down menus.)As in
the case of MACRS, if the tax rate will
increase substantially, then Markov may be better off
claiming
▼
higher
lower
depreciation expenses in
▼
later
early
years because the tax benefit at that time will be greater.