The Winchester Company plans to buy a machine for $500,000 anddepreciate it ona straight-line basis over a 5-year period for taxpurposes. There is no salvvage value (i.e. no resale value)expected at the end of the fifth year. The tax rate is 40% and theappropriate discount rate is 10%. Assume that the cash flows occurat the end of each year.

a. Winchester can choose to either expense the machineimmediately or depreciate it over 5 years. Which would yourecommend? Should Winchester buy the machine? Why or why not?

b. Four years have passed. Winchester Company plans to sell thepiece of equipment immediately for $50,000. (That is, the currentmarekt "salvage value" of the equipment is $50,000.) The equipmentwas purchased four years earlier at a cost of $500,000 and is beingdepreciated for tax purposes on a straight-line basis over a 5-yearlife. The company's tax rate is 40%. The loss on the sale of theequipment is a tax-reductible expense. The required return forWinchester is 10%

1. What is the after-tax cash flow from the sale of the piece ofequipment as of the end of 4 years?

2. If Winchester sells the equipment at the end of 4 years, thecompany will "lose" the tax shield of the remaining depreciation asof that date. What is the present value of the "lost" depreciationtax shelter as of the end of 4 years?

3. What is the net value of selling at the end of 4 years?