Your firm is considering a project that would require purchasing $7.2 million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the firm's tax rate is 20% using the alternative depreciation methods below. Note that because the depreciation tax shield is essentially a riskless cash flow (assuming the firm's tax rate remains constant), the appropriate cost of capital to evaluate the benefit from accelerated depreciation is the risk-free rate; assume this rate is 7% for all maturities. c. Using MACRS depreciation with a five-year recovery period and starting immediately. d. 100% bonus depreciation (all the depreciation expense occurs when the asset is put into use, in this case immediately).

is the risk-free rate; assume this rate is 7% for all maturities. a. Straight-line over a 10-year period, with the first deduction starting in one year. b. Straight-line over a five-year period, with the first deduction starting in one year. c. Using MACRS depreciation with a five-year recovery period and starting immediately. d. 100% bonus depreciation (all the depreciation expense occurs when the asset is put into use, in this case immediately). a. Straight-line over a 10-year period, with the first deduction starting in one year. The present value of the depreciation tax shield associated with this equipment is $ b. Straight-line over a five-year period, with the first deduction starting in one year. The present value of the depreciation tax shield associated with this equipment is $ c. Using MACRS depreciation with a five-year recovery period and starting immediately. The present value of the depreciation tax shield associated with this equipment is $ million. (Round the final answer to three decimal places. Round all intermediate values to four decimal places as needed.) million. (Round the final answer to three decimal places. Round all intermediate values to four decimal places as needed.) million. (Round the final answer to three decimal places. Round all intermediate values to four decimal places as needed.) That's incorrect. You need to first calculate the depreciation expenses by multiplying the equipment cost, $7.2 million, by each year's depreciation in the MACRS schedule. Following this, multiply each depreciation expense by the tax rate, 20%. unicuic Next, we discount each year's depreciation tax shield back to find the present value, using a cost of capital of 7% : PV=n=05(1+r)nCn We can also compute this result using a spreadsheet