Suppose that Sudbury Mechanical Drifters is proposing to invest $10 million in a new factory. It can depreciate this investment straight-line over 10 years. The tax rate is 40%, and the discount rate is 10%.

a. What is the present value of Sudbury’s depreciation tax shields?

b. Suppose that the government allows companies to use double-declining-balance depreciation with the option to switch at any point to straight-line. Now what is the present value of the depreciation tax shields?

c. What would be the present value of the tax shield if the government allowed Sudbury to write-off the factory immediately?