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PV of tax savings with MACRS, with Straight lineCharleston Corporation will acquire a computer system for
$1,000,000 on January 1, 2009. The computer system will have a 5-year life for
tax purposes. The company’s marginal tax rate is expected to be 15% in 2009 and
2010, but is expected to be 40% in later years. The company’s required rate of
return is 12%.(a) What is the total present value of tax savings if the
company uses MACRS depreciation?(b) What is the total present value of tax savings if the
company uses straight-line depreciation?
(c) Which depreciation method should be chosen? (Under
MACRS, the depreciation rate for an asset with 5-year tax life is: 20%, 32%,
19.2%, 11.52%, 11.52%, 5.76% in year1, year2, year3, year4, year5, and year 6
respectively).