Question:
Kansas System Solutions operates consulting offices in three Midwest locations. The firm is presently considering an investment in a new mainframe computer and communication software. The computer would cost $1,000,000 and have an expected life of eight years. For tax purposes, the computer can be depreciated using the straight-line method over five years. No salvage value is recognized in computing depreciation expense and no salvage is expected at the end of the life of the equipment. The company's cost of capital is 10 percent and its tax rate is 35 percent.
a. Compute the present value of the depreciation tax benefit if the company uses the straight-line depreciation method.
b. Compute the present value of the depreciation tax benefit assuming the company uses the double declining balance method of depreciation with a five-year life.
c. Why is the depreciation tax benefit computed in part (b) larger than that computed in pa