Answer Happy

$ Investment (million) Useful life Tax rate 15 5 21% a. What is the annual depreciation expense associated with this equipment? Depreciation (million) $ 3.00 b. What is the annual depreciation tax shield? Tax shield (million) $ 0.63 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. 1 2 3 5 MACRS Depreciation (million) Year 0 Equipment Cost $ 15.000 32.00% 20 0094 19.20% 11.52% 11.52% 5.76%

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. 2 3 5 MACRS Depreciation (million) Year 0 Equipment Cost $ 15.000 Depreciation Rate 20.00% Depreciation Expense $ 3.000 Depreciation Tax Shield S 0.630 32.00% 19.20% 11.52% 11.52% 5.76% 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? MACRS Markov should prefer: NPV. depreciation. It leads to: higher 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?