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Markov Manufacturing recently spent $ 1 3 million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment
Markov Manufacturing recently spent $ million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment will have a useful life of five years, and its corporate tax rate is The company plans to use straightline depreciation.
a What is the annual depreciation expense associated with this equipment?
b What is the annual depreciation tax shield?
c Rather than straightline depreciation, suppose Markov will use the MACRS depreciation method for fiveyear property. Calculate the depreciation tax shield each year for this equipment under this accelerated depreciation schedule.
d If Markov has a choice between straightline and MACRS depreciation schedules, and its marginal corporate tax rate is expected to remain constant, which should it choose? Why?
e How might your answer to part d change if Markov anticipates that its marginal corporate tax rate will change substantially over the next five years?
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