Talbot Industries, Campbell Company, and MorChuck Corporation are among the many companies that understand the importance of cash flow estimation and risk analysis. For example, Talbot conducts risk analysis using sensitivity analysis, break-even analysis, scenario analysis, and Monte Carlo simulation analysis on a wide variety of capital budgeting projects. The companys CFO, Erin Joyner MBA says that risk analysis especially the use of Monte Carlo simulation has been very useful in analyzing more complex projects with simulation software packages, and ultimately helping the company to make superior decisions. Last year the company spent $1.5 million to investigate a site for a potential new distribution center, which was not realized because the distribution center was not built. The company is now contemplating replacing an old equipment with a new model. The $1.5 million cost of the site will not be included in any capital budgeting decision. The CEO of Talbot Industries has asked you to assist Erin Joyner to prepare a report for the Investment Committee to help finalize decision on the new equipment. In the report the CEO wants you to address certain key concepts, cash flow projections, and risk analysis.

1. Talbot Inc. wants to depreciate the manufacturing equipment using straight-line depreciation method. The equipment will last for 10 years, and the cost basis is $20 million. Estimate the depreciation expense for each year.