Suppose that you are evaluating an asset that costs $400,000 and that is depreciated for tax purposes using MACRS rates for a fiveyear asset. Assume a marginal tax rate of 30%.

a. What is the amount of the depreciation expense in the second year?

b. What is the amount of the depreciation tax shield in the second year?

c. If you plan to dispose of the asset at the end of the third year, what is the asset’s tax basis at the time of sale?

d. If you can sell the asset for $50,000 at the end of the fifth year, do you have a gain or a loss? What are the tax consequences of this sale? What are the cash flow consequences?

e. If you can sell the asset for $100,000 at the end of the fifth year, do you have a gain or a loss? What are the tax consequences of this sale? What are the cash flow consequences?