Spherical Manufacturing recently spent $15 million to purchase some equipment used in the manufacture of disk drives.

Question:

Spherical Manufacturing recently spent $15 million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of 25%, and Spherical's marginal corporate tax rate is 35%.

a. What are the annual CCA deductions associated with this equipment for the first five years?

b. What are the annual CCA tax shields for the first five years?

c. What is the present value of the first five CCA tax shields if the appropriate discount rate is 10% per year?

d. What is the present value of all the CCA tax shields, assuming the equipment is never sold and the appropriate discount rate is 10% per year?

e. How might your answer to part (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five years?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...