Question: Markov Manufacturing recently spent $13 million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment will have a useful life of five? years, and its marginal corporate tax rate is 40%. The company plans to use? straight-line depreciation.
a. What is the annual depreciation expense associated with this equipment?
b. What is the annual depreciation tax shield?
c. Rather than? straight-line depreciation, suppose Markov will use the MACRS depreciation method for five-year property. Calculate the depreciation tax shield each year for this equipment under this accelerated depreciation schedule.
d. If Markov has a choice between straight-line and MACRS depreciation? schedules, and its marginal corporate tax rate is expected to remain? constant, which should it? choose? ? Why?
e. How might your answer to part (d) change if Markov anticipates that its marginal corporate tax rate will change substantially over the next five years?