Chapter 8, Problem 15P

a.

Summary Introduction

MM recently spent $15 million for purchasing some equipment used in disk drives. The firm foresees the useful life of the equipment as five years and the marginal corporate tax rate as 35%. The company uses straight-line depreciation.

The annual depreciation expense associated with this equipment.

b.

Summary Introduction

Given that the marginal corporate income tax rate is 35%, the annual depreciation provides some extent of tax shield.

To determine: The tax shield provided by the annual depreciation.

c.

Summary Introduction

Instead of the straight line method of depreciation, if the MACRS method is an option to compute the depreciation provision, determine the income tax shield using the MACRS depreciation schedule.

The income tax shield using the MACRS depreciation schedule.

d.

Summary Introduction

In case MM had a choice between straight line and MACRS depreciation schedule and its marginal corporate income tax rate remains constant, which method should MM choose and why.

e.

Summary Introduction

If MM had a choice between the straight line method of depreciation and the accelerated method using MACRS schedule, determine which will be better if MM anticipates substantially higher marginal corporate income tax rates in the future years.