Exercise A-13 (Algo) Present Value of Cash Flows Rush Corporation plans to acquire production equipment for $617,500 that will be depreciated for tax purposes as follows: year 1, $123,500; year 2,...

Rush Corporation plans to acquire production equipment for $617,500 that will be depreciated for tax purposes as follows: year 1, $123,500; year 2, $213,500; and in each of years 3 through 5, $93,500 per year. An 8 percent discount rate is appropriate for this asset, and the company’s tax rate is 40 percent. Use Exhibit A.8 and Exhibit A.9.

Required:

a. Compute the present value of the tax shield resulting from depreciation.

b.Compute the present value of the tax shield from depreciation assuming straight-line depreciation ($123,500 per year).