Problem
SJ Industries is considering a product expansion project after receiving a favorable feasibility study for which it paid $5 million. The project requires an investment in machinery today of $15 million that can be depreciated for tax purposes straight-line to zero over four years. The project will generate annual revenues of $17 million in years 1-4 and annual expenses (excl. depreciation) are projected to be $12 million pretax each year. An immediate working capital investment of $1 million is required, and working capital will remain at that level for the life of the project. At the end of year 4 the company expects to recover 50% of the initial value of the working capital. Also at the end of year 4, the company expects to sell the machinery for $4 million. The firm is taxed at 40% and the appropriate discount rate is 10%. How much is the depreciation at year one?