Lilly Company is planning to buy a set of special tools for its grinding operation. The cost

Question:

Lilly Company is planning to buy a set of special tools for its grinding operation. The cost of the tools is $18,000. The tools have a 3-year life and qualify for the use of the 3-year MACRS. The tax rate is 40%; the cost of capital is 12%.

Required:

1. Calculate the present value of the tax depreciation shield, assuming that straight-line depreciation with a half-year life is used.

2. Calculate the present value of the tax depreciation shield, assuming that MACRS is used.

3. What is the benefit to the company of using MACRS?

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