Depreciation tax shield (LO2, LO5). Quality Metal Works is considering a proposal to buy a new furnace for $2,500,000. The furnace has a useful life of 10 years with no expected salvage value. The...

Depreciation tax shield (LO2, LO5). Quality Metal Works is considering a proposal to buy a new furnace for $2,500,000. The furnace has a useful life of 10 years with no expected salvage value. The firm requires a rate of return of 8% on all its investments. Assume that the purchase takes place now and that all other cash flows occur at the end of each year. Assume straight-line depreciation for tax purposes. The applicable tax rate is 30%.

Required:

a. Ignore the depreciation tax shield. What are the minimum annual net (i.e., aftertax) cash inflows that this furnace must generate for the company to justify the investment?

b. How much is the annual depreciation tax shield? What is the present value of the depreciation tax shield?

c. If you take into account the depreciation tax shield, will the minimum annual net (i.e., after tax) cash inflows (excluding the depreciation tax shield) needed to justify this investment increase or decrease? By how much?