Your firm is considering a project that would require purchasing

$7.5

million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the firm's tax rate is

20%

using the alternative depreciation methods below. Note that because the depreciation tax shield is essentially a riskless cash flow (assuming the firm's tax rate remains constant), the appropriate cost of capital to evaluate the benefit from accelerated depreciation is the risk-free rate; assume this rate is

9%

for all maturities.

a. Straight-line over a 10-year period, with the first deduction starting in one year.

The present value of the depreciation tax shield associated with this equipment is___________

million.

b. Straight-line over a five-year period, with the first deduction starting in one year.

c. Using MACRS depreciation with a five-year recovery period and starting immediately.

d. 100% bonus depreciation (all the depreciation expense occurs when the asset is put into use, in this case immediately).