Markov Manufacturing recently spent $15 million dollars to purchase some equipment used in the manufacture of disk drives. The firm expects this equipment will have a useful life of five years, and its marginal corporate tax rate is 35%. The company plans to use straight-line depreciation.
a) What is the annual deprecation expense associated with the equipment?
b) What is the annual deprecations tax shield?
c) Rather than straight-line depreciation, suppose Markov will use the MACR depreciation method for five year property. Calculate the depreciation tax shield each year for this equipment under the accelerated depreciation schedule.
d) If Markov has a choice between straight line and MACR depreciation schedule, and its marginal corporate tax rate is expected to remain constant, which should it choose? Why?
e) How might your answer to (d) change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next five years?
The solution computes annual deprecation expense, annual deprecations tax shield, depreciation tax shield under the accelerated depreciation schedule. Also answers, to choose between straight line and MACR depreciation schedule.