Question

In: Finance

Markov Manufacturing recently spent $ 15.0$15.0 million to purchase some equipment used in the manufacture of...

Markov Manufacturing recently spent

$ 15.0$15.0

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

21 %21%.

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 the​ five-year life of the 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 schedule should it​ choose? Why?

e. How might your answer to part

​(d​)

change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next five​ years?

f. Under the TCJA of​ 2017, Markov has the option to take​ 100% "Bonus" depreciation in the year in which the equipment is put into use. This means that in that​ year, Markov would take the full depreciation expense equivalent to the cost of buying the equipment. Rather than​ straight-line depreciation, suppose Markov will use the bonus depreciation method. Calculate the depreciation tax shield each year for this equipment with bonus depreciation.

g. If Markov has a choice between​ straight-line, MACRS and bonus depreciation​ schedules, and its marginal corporate tax rate is expected to remain​ constant, which schedule should it​ choose? Why?

h. How might your answer to part

​(g​)

change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next five​ years?

Note​:

Assume that the equipment is put into use in year 1.

Solutions

Expert Solution

Solution:- Given in Question-

Equipment Cost = $15 Million

useful Life = 5 years

Tax Rate = 21%

A. To Calculate the annual depreciation expense associated with this​ equipment -

Annual Depreciation =

Annual Depreciation =

Annual Depreciation = $3 Million

B. the annual depreciation tax​ shield -

Tax Shiled on annual Depreciation = $3 Million * 0.21

Tax Shiled on annual Depreciation = $0.63 Million

C. Depreciation per year as per MACRS-

If you have any query related to question then feel free to ask me in a comment.Thanks.


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