1. a) A project requires an initial investment of $5 million and will yield operating cash flows of $1.5 million per year for the next 10 years. At the end of 10 years, the projects assets can be divested for $250,000. The marginal tax rate is 40%, and the CCA rate is 30%. If the required rate of return is 12%, what is the present value of the CCA tax shields?

1. b) Jabba-Dabba-Doo Inc. renovated its warehouses exactly two years ago at a cost of $3 million. The renovations were considered leasehold improvement, and the cost was therefore subject to straight-line depreciation for tax purposes. The firm will not need to renovate the warehouses for another three years (from today). Given that the firms marginal tax rate is 35% and required return is 11%, what is the present value of the remaining depreciation tax shields on the leasehold improvement? Ignore the half-year rule, and round your answer to the nearest dollar.

1. c) For part a, describe what would happen to the asset if you used straight-line depreciation. For part b, describe what would happen to the asset if you used CCA.