Square electronics is a pioneer name in Air-conditioner production. It is planning to spend $15 million to purchase a new equipment that will help faster production of Aircon. The firm expects that this equipment will have a useful life of five years. The marginal corporate tax rate is 30%. Square has appointed you to analyse few things. It plans to use straight-line depreciation for the new equipment but would also like to explore other options.

i. Using straight line depreciation, what is the annual depreciation expense associated with this new equipment? What is the annual depreciation tax shield?

ii. Rather than straight-line depreciation, if Square uses the diminishing value depreciation method for the five-year life of the equipment (using a depreciation rate of 40% each year of remaining value). Calculate the depreciation tax shield each year for this equipment under this accelerated depreciation schedule.

iii. If Square has a choice between straight-line and diminishing value depreciation schedules, and its marginal corporate tax rate is expected to remain constant, which schedule should it choose? Why?

iv. Square Electronics purchased its existing machine (i.e. the machine it currently uses) for $1 million three years ago. The existing machine is currently being depreciated using straight-line depreciation to zero value. When purchased, the current machine has sevenyear life. Given the tax rate is 30%. If you sell the machine right now (after three years of depreciation) for $700 000, what is your incremental cash flow from selling the machine?