Markov Manufacturing recently spent $10.7 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 marginal corporate tax rate is 35%. The company plans to use straight-line depreciation.

a. What is the annual depreciation expense associated with this equipment?

b. What is the annual depreciation tax shield?

c. If Markov has a choice between straight-line and MACRS depreciation schedules, and its marginal corporate tax rate is expected to remain constant, which schedule should it choose? Why? (Choose between ABCD below)

A. With straight-line depreciation, the firm's depreciation expenses are lower initially, leading to higher earnings. Thus, straight-line depreciation leads to a higher NPV of Markov's FCF.

B.The straight-line depreciation is recommended only for assets that last more than 5 years.

C.With MACRS, the firm receives the depreciation tax shields sooner. Thus, MACRS depreciation leads to a higher NPV of Markov's FCF.

D.With either method, the total depreciation tax shield is the same. Therefore, it does not matter which method is used.

e. How might your answer to part(d ) change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next five years? (Choose between ABCD)

A.Even if its tax rate is expected to change, Markov is better off using MACRS depreciation rather than straight-line depreciation.

B.Markov may be better off using the straight-line method if it expects its tax rate to decrease substantially in later years.

C.Markov may be better off using the straight-line method if it expects its tax rate to increase substantially in later years.

D.The straight-line depreciation is recommended only for companies whose tax rates are higher than

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