Example: Salvage Value - A firm believes that as it winds down the production of one of its existing product lines it will be able to sell off some of its older machinery. It believes it can sell this equipment this year for a value of $5 million. It acquired this machinery at a cost of $10 million, and total accumulated depreciation has been $8 million. If it sells this equipment (and pays a 20% corporate tax rate) what will be the addition to the firm's cash flows that arises from selling off the equipment this year? Depreciation - Recall that depreciation is a non-cash expense and is only relevant because it affects taxes - Depreciation schedules are governed by tax law: - Straight line depreciation: depreciate a fixed amount every year. - E.g., equipment with a five year life is depreciated to a $ o book value over the five years. For a $100,000 investment, deduct $20,000 in depreciation expenses each year. - Accelerated depreciation: government allows for assets to be depreciated faster than the straight line method would dictate. - As a manager, you'd generally prefer depreciation allowances to be as early as possible. Why is this the case