Charleston Corporation will acquire a computer system for $1,000,000 on January 1, 2009. The computer system will have a 5-year life for tax purposes. The company's marginal tax rate is expected to be 15% in 2009 and 2010, but is expected to be 40% in later years. The company's required rate of return is 12%.
(a) What is the total present value of tax savings if the company uses MACRS depreciation?
(b) What is the total present value of tax savings if the company uses straight-line depreciation?
(c) Which depreciation method should be chosen? (Under MACRS, the depreciation rate for an asset with 5-year tax life is: 20%, 32%, 19.2%, 11.52%, 11.52%, 5.76% in year1, year2, year3, year4, year5, and year 6 respectively).
The solution explains how to calculate the PV of tax savings with MACRS depreciation and with straight line depreciation