(Depreciation) Texas System Solutions operates consulting offices in three loca¬ tions in Dallas. The firm is presently considering an investment in a new main frame computer and communication software. The computer would cost $1,000,000 and have an expected life of 8 years. For tax purposes, the computer can be depreciated using the straight-line method over 5 years. No salvage value is recognized in computing depreciation expense and no salvage is expected at the end of the life of the equipment. The company’s cost of capital is 10 percent and its tax rate is 35 percent.

a. Compute the present value of the depreciation tax benefit if the company uses the straight-line depreciation method.

b. Compute the present value of the depreciation tax benefit assuming the com¬ pany uses the double declining balance method of depreciation with a five year life.

c. Why is the depreciation tax benefit computed in part b larger than that computed in part a?