Markov Manufacturing recenty spent $16.2 million to purchase some equipment used in the manufacture of disk ditves. The firm expects that this equipment will have a useful lie of five years, and its marginal corporate tax rate is 21%. The company plans to use straight-line dopreciation. a. What is the arnual depreciation expense associatod with this equipment? b. What is the annual depreciation tex shield? c. Rather than straight-ine depreciation, suppose Markov will use the MACRS depreciation method for the five-year Mfe of the properfy. Calculate the deprecation tax shield each year for chis equipment under this accelerated deprecistion schedule. d. If Mackov has a cholce between straight ine and MACRS depreciation schedules, and its mayginal corporate tax rate is expected to remain canstant, which schedule should it choose? Why? 6. How might your answer to part (d) change it Markov antipoles that its marginal corporate tax rate will increase substantially over the next five years? Note: Assume that the equipment is put into use in year 1 . a. What is the annual depreciation expense associated wth this equipment? The annual depreciation expense is 5 milion. (Round to three decimal places.). b. What is the annual depreciation tax shield? The annual depreciation tax shield is $ million. (Round to three decimal places.) C. Pather than straight-ino deprociabion, suppose Markov wil use the MACrS depteciation method for the five-year lfe of the property. Caiculate the depreciaton tax shield each year for this equipment under this acceleraled depreciation schodule The depreciation tax shield for yoar 1 is 1 maion. (Round to three decimal places.) The depreciaton tax shinia for year 2 is 1 Nvilion. (Round to three decimal places) The depreciaton tax thieid for year 3 is 5 millon. (Round to thee decimal places.) The degreciation tax thield for year 4 is 5 million. (Round to three decimal places) The depreciation tax shiold for year 5 is 1 milion. (Round to three decimal places.) The depreciation tax ahiold for year 6 is 5 millon. (Round to three decimal places.) d. If Markov has a choice between straight-ine and MACRS depreciation schedules, and is margnal corporate tax rate is expected to reman constant, which schedule should it choose? Why? (Select the best choice below) A. With straight-ine deprecistion, the ffrm's depreciator expenses are lower initally, leading to higher eamrings. Thus, straight-ine dopreclation leads to a hygher NPV of Markov's FCF B. With MACRS, the fem recelves the depreciation tax shields sooner. Thus, MACRS depreciation leads to a higher NPV of Markov's FCF. C. The etraightiline depreciatien is recommended only for assets that last more than 5 years. D. With emher method, the total depreciation tax shieid is the same. Therefore, it does not matter which method is ised. How might yout answer to part (d) change if Markov antioates that its marginal corporase tax rase wil increase substantialy over the next five years? (Select the best choice below) A. Even if is tax tale is expected to change, Makov is better of using MACRs deprecuation rather than straighiline depreciation. B. The atraght-tine depreciation is recomenended only for comparies whose tax rates are higher than 21% c. Markor may be beller of using tie straight ene methed it a eupecte its lak rase to inciease substantially in later years. D. Markor may be better of ushg the svaighune method if it expects its lax rate to decresse substangally in later year
