Problem
Markov Manufacturing recently spent $17 million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment will have a useful life of five years, and its corporate tax rate is 20%. The company plans to use straight-line depreciation.
i. What is the annual depreciation expense associated with this equipment?
ii. What is the annual depreciation tax shield?
iii. Rather than straight-line depreciation, suppose Markov will use the MACRS depreciation method for five-year property. Calculate the depreciation tax shield each year for this equipment under this accelerated depreciation schedule.