Suppose that under straight-line depreciation, a corporation would be allowed to depreciate a $10,000 asset over 4 years. Under accelerated depreciation, the corporation would be allowed to depreciate 75% of the asset's value immediately in the first year and the remaining 25% in the second year. Assume that the discount rate is 10%.
(a) Suppose that the corporation normally makes $56,000 of annual profit on which it pays a 35% tax every year. What is the present discounted value of the tax deduction under accelerated depreciation?
(b) How much higher is the present discounted value of the firm's profits under accelerated depreciation than under straight-line depreciation?