Markov manufacturing recently spent 16 million to purchase some euipment used in the manufactures disk drives. The firm expects that this equipment will have a useful life of five years, and its marginal corporate tax rate is 32%. The company plans to use straight line depreciation.

A. What is the annual depreciation expense associated with the equipment?

B. What is the annual depreciation tax shield?

C. Rather than straight line depreciation, suppose Markov will use the MACRS depreciation method for five-year property. Calculate the depreciation tax shield each year for this equipment under the accelerated depreciation schedule.

The depreciation tax shield year 0 (Round to three decimal places)

year 1 (Round to three decimal places)

year 2 (Round to three decimal places)

year 3 (Round to three decimal places)

year 4 (Round to three decimal places)

year 5 (Round to three decimal places)

D. If Markov has a choice between straight line and MACRS depreciation schedule, and its margial corporate tax rate is expected to remain constant, which should it choose?

A. With MACRS the firm recieves the depreciation tax shield sooner. Thus, MACRS depreciation leads to a higher NPV of MArkovs FCF

B. With straight line depreciation the firms depreciation expensesare lower initially leading to higher earnings Thus straight line depreciation leads to a higer NPV of Markovs FCF.

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

D. None of the above

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?

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

B. Even if a tax rate is expected to change. Markov is better off using MACR depreciation rather than straight line depreciation

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

D. None of the above