EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Chapter 8, Problem 16P
Markov Manufacturing recently spent $15 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 marginal corporate tax rate is 35%. The company plans to use straight-line
- a. What is the annual depreciation expense associated with this equipment?
- b. What is the annual depreciation tax shield?
- c. 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.
- d. If Markov has a choice between straight-line and MACRS depreciation schedules, and its marginal corporate tax rate is expected to remain constant, which should it choose? Why?
- e. How might your answer to part (d) change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next five years?
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Markov Manufacturing recently spent $15 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.
a. What is the annual depreciation expense associated with this equipment?
b. What is the annual depreciation tax shield?
c. 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.
d. If Markov has a choice between straight-line and MACRS depreciation schedules, and its marginal corporate tax rate is expected to remain constant, which should it choose? Why?
e. How might your answer to part (d) change if Markov anticipates that its marginal corporate tax rate will change substantially over the next five years?
a. What is the annual…
Sunrise Furniture Inc. wants to upgrade the existing production process. The cost-cutting project can potentially reduce expenses by $665,000 per year. The project will require an initial investment in fixed assets of $1,268,000 that will be depreciated using the straight-line method to a zero book value over the 5-year life of the project. The company has a marginal tax rate of 23 percent. What is the depreciation tax shield at the end of year 2?
A.
$58,328
B.
$411,400
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$94,622
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$253,600
b. Cendrawasih Inc. is considering replacing the equipment it uses to produce crayons.
The equipment would cost RM1.37 million, have a 12-year life, and lower
manufacturing costs by an estimated RM304,000 a year. The equipment will be
depreciated using straight-line depreciation to a book value of zero. The required
rate of return is 15 percent and the tax rate is 35 percent. Determine the net income
from this proposed project.
Chapter 8 Solutions
EBK CORPORATE FINANCE
Ch. 8.1 - How do we forecast unlevered net income?Ch. 8.1 - Prob. 2CCCh. 8.1 - Prob. 3CCCh. 8.2 - Prob. 1CCCh. 8.2 - What is the depreciation tax shield?Ch. 8.3 - Prob. 1CCCh. 8.3 - Prob. 2CCCh. 8.4 - Prob. 1CCCh. 8.4 - What is the continuation or terminal value of a...Ch. 8.5 - Prob. 1CC
Ch. 8.5 - How does scenario analysis differ from sensitivity...Ch. 8 - Pisa Pizza, a seller of frozen pizza is...Ch. 8 - Kokomochi is considering the launch of an...Ch. 8 - Home Builder Supply, a retailer in the home...Ch. 8 - Hyperion, Inc. currently sells its latest...Ch. 8 - Table 8.1 Spreadsheet HomeNets Incremental...Ch. 8 - Prob. 6PCh. 8 - Castle View Games would like to invest in a...Ch. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - A bicycle manufacturer currently produces 300,000...Ch. 8 - One year ago, your company purchased a machine...Ch. 8 - Prob. 15PCh. 8 - Markov Manufacturing recently spent 15 million to...Ch. 8 - Prob. 17PCh. 8 - Arnold Inc. is considering a proposal to...Ch. 8 - Bay Properties is considering starting a...Ch. 8 - Prob. 21PCh. 8 - Prob. 22P
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