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Suppose that Sudbury Mechanical Drifters is proposing to invest $10.9 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 12%

a. What is the present value of Sudburys depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.)

straight line schedule	year1	year2	year3	year4	year5	year6	year7	year8	year9	year10	Total
straight line 10 year
tax shields at 40%Tc
PV (Tax Shields) at 12 %

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?

double decline schedule	year1	year2	year3	year4	year5	year6	year7	year8	year9	year10	total
Start of year Book Value
Depreciation
Tax Shields at 40% Tc
PV (tax shields) at 12%

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.)

percent value of depreciation tax shields

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