a. What is the annual depreciation expense associated with this equipment? b. What is the annual...

Transcribed Image Text:

a. What is the annual depreciation expense associated with this equipment? b. What is the annual depreciation tax shield? 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. 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? 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? Investment (million) Useful life S 15 5 21% Tax rate a. What is the annual depreciation expense associated with this equipment? Depreciation (million) b. What is the annual depreciation tax shield? Tax shield (million) 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. MACRS Depreciation (million) Year Equipment Cost Depreciation Rate Depreciation Expense 0 1 2 3 4 5 $ 15.000 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Depreciation Tax Shield 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? Markov should prefer: depreciation. It leads to: NPV. 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? Markov may be better off claiming: depreciation expenses in later years. a. What is the annual depreciation expense associated with this equipment? b. What is the annual depreciation tax shield? 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. 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? 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? Investment (million) Useful life S 15 5 21% Tax rate a. What is the annual depreciation expense associated with this equipment? Depreciation (million) b. What is the annual depreciation tax shield? Tax shield (million) 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. MACRS Depreciation (million) Year Equipment Cost Depreciation Rate Depreciation Expense 0 1 2 3 4 5 $ 15.000 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Depreciation Tax Shield 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? Markov should prefer: depreciation. It leads to: NPV. 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? Markov may be better off claiming: depreciation expenses in later years.