A firm is considering a new project that will require purchasing equipment which will have an installed cost of $1 million. The project has a five year life, and the equipment will be depreciated using 5-year MACRS depreciation. The marginal tax rate is 40%.
a. Compute the depreciation expense each year over the five-year life of the project.
b. Assume that the equipment could be sold for $350,000 at the end of the project’s life. Compute the after-tax proceeds from the sale of equipment in year 5.
c. Now assume that the equipment could be sold for $35,000 at the end of the project’s life. Compute the after-tax proceeds from the sale of equipment in year 5.