Rush Corporation plans to acquire production equipment for $642,500 that will be depreciated for tax purposes as follows: year 1, $128,500; year 2, $218,500; and in each of years 3 through 5, $98,500 per year. An 8 percent discount rate is appropriate for this asset, and the company’s tax rate is 40 percent. Use Exhibit A.8 and Exhibit A.9.
Required:
a. Compute the present value of the tax shield resulting from depreciation. (Round PV factor to 3 decimal places and other intermediate calculations to nearest whole number.)
b. Compute the present value of the tax shield from depreciation assuming straight-line depreciation ($128,500 per year). (Round PV factor to 3 decimal places and other intermediate calculations to nearest whole number.)