Suppose that Sudbury Mechanical Drifters is proposing to invest $10.6 million in a new factory....
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Suppose that Sudbury Mechanical Drifters is proposing to invest $10.6 million in a new factory. It can depreciate this investment straight-line over 10 years. The tax rate is 40%, and the discount rate is 10%.
a. What is the present value of Sudburys depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.)
b. Suppose that the government allows companies to use double-declining-balance depreciation with the option to switch at any point to straight-line. Now what is the present value of the depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.)
c. What would be the present value of the tax shield if the government allowed Sudbury to write-off the
factory immediately? (Enter your answer in millions rounded to 1 decimal place.)
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