A firm is considering a new project that will require purchasing equipment which will have a cost of $18 million. Installation and modification of the equipment will cost $2 million. The project has a five year life, and the equipment will be depreciated using 3-year MACRS depreciation. The firm’s marginal tax rate is 40%.
a. Compute the depreciation expense each year over the five-year life of the project.
b. The firm estimates that the equipment could be sold for $3 million at the end of the project’s life. Compute the after-tax proceeds from the sale of equipment in year 5.