Markov Manufacturing recently spent

$11.1 million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment will have a useful life of fiveyears, and its marginal corporate tax rate is 21%. The company plans to usestraight-line depreciation.

a. What is the annual depreciation expense associated with thisequipment?

b. What is the annual depreciation taxshield?

c. Rather thanstraight-line depreciation, suppose Markov will use the MACRS depreciation method for thefive-year life of the property. Calculate the depreciation tax shield each year for this equipment under this accelerated depreciation schedule.

d. If Markov has a choice betweenstraight-line and MACRS depreciationschedules, and its marginal corporate tax rate is expected to remainconstant, which schedule should itchoose? Why?

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

f. Under the TCJA of2017, Markov has the option to take100% "Bonus" depreciation in the year in which the equipment is put into use. This means that in thatyear, Markov would take the full depreciation expense equivalent to the cost of buying the equipment. Rather thanstraight-line depreciation, suppose Markov will use the bonus depreciation method. Calculate the depreciation tax shield each year for this equipment with bonus depreciation.

g. If Markov has a choice betweenstraight-line, MACRS and bonus depreciationschedules, and its marginal corporate tax rate is expected to remainconstant, which schedule should itchoose? Why?

h. How might your answer to part (g) change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next fiveyears?

a. What is the annual depreciation expense associated with thisequipment?

The annual depreciation expense is $_______________ million. (Round to three decimalplaces.)

b. What is the annual depreciation taxshield?

The annual depreciation tax shield is $_______________ million. (Round to three decimalplaces.)

c. Rather thanstraight-line depreciation, suppose Markov will use the MACRS depreciation method for thefive-year life of the property. Calculate the depreciation tax shield each year for this equipment under this accelerated depreciation schedule.

The depreciation tax shield for year 1 is $_______________ million.(Round to three decimalplaces.)

The depreciation tax shield for year 2 is $_______________ million.(Round to three decimalplaces.)

The depreciation tax shield for year 3 is $_______________ million.(Round to three decimalplaces.)

The depreciation tax shield for year 4 is $_______________ million.(Round to three decimalplaces.)

The depreciation tax shield for year 5 is $_______________ million.(Round to three decimalplaces.)

The depreciation tax shield for year 6 is $____________ million.(Round to three decimalplaces.)

d. If Markov has a choice betweenstraight-line and MACRS depreciationschedules, and its marginal corporate tax rate is expected to remainconstant, which schedule should itchoose? Why? (Select the best choicebelow.)

AWith eithermethod, the total depreciation tax shield is the same. Therefore, it does not matter which method is used.

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

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

D Withstraight-line depreciation, thefirm's depreciation expenses are lowerinitially, leading to higher earnings.Thus, straight-line depreciation leads to a higher NPV ofMarkov's FCF.

e. How might your answer to part (d) change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next fiveyears?(Select the best choicebelow.)

AEven if its tax rate is expected tochange, Markov is better off using MACRS depreciation rather thanstraight-line depreciation.

B Thestraight-line depreciation is recommended only for companies whose tax rates are higher than 21%.

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

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

f. Under the TCJA of2017, Markov has the option to take100% "Bonus" depreciation in the year in which the equipment is put into use. This means that in thatyear, Markov would take the full depreciation expense equivalent to the cost of buying the equipment. Rather thanstraight-line depreciation, suppose Markov will use the bonus depreciation method. Calculate the depreciation tax shield each year for this equipment with bonus depreciation.

The depreciation tax shield for year 1 is $__________ million.(Round to three decimalplaces.)

The depreciation tax shield for years2-6 is $_________ million.(Round to three decimalplaces.)

g. If Markov has a choice betweenstraight-line, MACRS and bonus depreciationschedules, and its marginal corporate tax rate is expected to remainconstant, which schedule should itchoose? Why?(Select the best choicebelow.)

AIn allcases, its total depreciation tax shield is the same. But with bonusdepreciation, it receives the entire depreciation tax shield in year 1thus, bonus depreciation leads to a higher NPV ofMarkov's FCF..

B In allcases, its total depreciation tax shield is the same. But with bonusdepreciation, it receives the entire depreciation tax shield in year 2thus, bonus depreciation leads to a higher NPV ofMarkov's FCF

C In allcases, its total depreciation tax shield is the same. But with bonusdepreciation, it receives the entire depreciation tax shield in year 0thus, bonus depreciation leads to a higher NPV ofMarkov's FCF.

D In allcases, its total depreciation tax shield is the same. But with bonusdepreciation, it receives the entire depreciation tax shield in year 3thus, bonus depreciation leads to a higher NPV ofMarkov's FCF.

h. How might your answer to part (g) change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next fiveyears?(Select from thedrop-down menus.)

As in the case ofMACRS, if the tax rate will increasesubstantially, then Markov may be better off claiming

higher

lower

depreciation expenses in

early

later

years because the tax benefit at that time will be greater