1) A firm is considering using either straight-line depreciation or 3-year MACRS to depreciate a $500,000 asset purchased today. The asset will be used for 4 years and will have no salvage value. If the firm's cost of capital is 10%/year, and their tax rate is 21%/year, how much will NPV be improved by using MACRS versus straight-line? To solve this question, calculate the depreciation tax shield (annual deprecation * tax rate) for each year for both methods, then calculate the NPV of the depreciation tax shield for both methods, and take the difference. For a 3-year MACRS schedule, depreciate 33.33% of the asset's value in year 1, 44.45% in year 2, 14.81% in year 3 and 7.41% in year 4. (Yes, a 3-year MACRS schedule has 4 years; I did not design these things :-) )

A) $16,106 B) $4,176 C) $23,103 D) $9,375 E) $61,458

2) Now assume the asset in the prior question is sold at the end of year 3 for $64,000. What would be the after-tax salvage value if the firm used the 3-year MACRS depreciation and tax rate described above?