Markov Manufacturing recently spent $15 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 it will be worthless afterwards. Assume the marginal corporate tax rate is 35%.

If the company plans to use straight-line depreciation,

Part A:

What is the annual depreciation tax shield?

Part B: Rather than straight-line depreciation, suppose Markov will use the MACRS depreciation method for the five-year life of the property.

What are the depreciation tax-shields each year for this equipment?

MACRS 5-year property Year 9 Rate 20.00% 32.00% 19.20% 11.52% 11.52% 576%