Markov Manufacturing recently spent $16 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 39%. 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?
a. What is the annual depreciation expense associated with this equipment?
The annual depreciation expense is ____million. (Round to three decimal places.)
b. What is the annual depreciation tax shield? The annual depreciation tax shield is ______ million. (Round to three decimal places.)
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.
The depreciation tax shield year 0 is $ _____ million. (Round to three decimal places.)
The depreciation tax shield year 1 is $ _____ million. (Round to three decimal places.)
The depreciation tax shield year 2 is $ _____ million. (Round to three decimal places.)
The depreciation tax shield year 3 is $ _____ million. (Round to three decimal places.)
The depreciation tax shield year 4 is $ _____ million. (Round to three decimal places.)
The depreciation tax shield year 5 is $ _____ million. (Round to three decimal places.)
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? (Select the best choice below.)
A. With either method, the total depreciation tax shield is the same. Therefore, it does not matter which method is used.
B. With MACRS, the firm receives the depreciation tax shields sooner. Thus, MACRS depreciation leads to a higher NPV of Markov's FCF.
C. With straight-line depreciation, the firm's depreciation expenses are lower intially, leading to higher earnings. Thus, straight-line depreciation leads to a higher NPV of Markov's FCF.
D. None of the above.
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? (Select the best choice below.)
A. Markov may be better off using the straight-line method if it expects its tax rate to decrease substantially in later years.
B. Even if its tax rate is expected to change, Markov is better off using MACR depreciation rather than straight-line depreciation.
C. Markov may be better off using the straight-line method if it expects its tax rate to increase substantially in later years.
D. None of the above.