A certain piece of equipment costs $32 million, plus an additional $2 million to install. This equipment qualifies under the five-year MACRS category.
For a firm that discounts cash flows at 12 percent and faces a tax rate of 34 percent, what is the present value of the depreciation tax savings associated with this equipment?
By how much would that number change if the firm could treat the $2-million installation cost as a deductible expense rather than include it as part of the depreciable cost of the asset?