Salem Corporation is planning to acquire a machine for one of its projects at a cost of $100,000. The machine has an economic life of 8 years, but it is classified as a 5-year property under MACRS. The company's cost of capital rate is 14%, and its income tax rate is 40%.
Required:
Determine the present value of the income tax benefits that result from the use of the MACRS recovery percentages provided in Exhibit 22-4, and compare it to the straight-line depreciation alternative. In computing straight-line depreciation, use a 5-year life with one-half of a year's depreciation in the first year, a full year's depreciation in years 2 through 5, and one-half of a year's depreciation in the sixth year.