Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $510,000. Of this sum, $61,000 described by the supplier as an installation cost. Ms. Potts does not know whether the company will need to treat this cost as a tax- deductible current expense or as a capital investment. In the latter case, the company could depreciate the $61,000 straight-line ove five years. How will the tax authority's decision affect the after-tax cost of the kiln? The tax rate is 25%, and the opportunity cost of capital is 6%. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Installation cost is expensed at the end of year 1 If installation cost is capitalized and depreciated over 5 years PV Tax shield
Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $510,000. Of this sum, $61,000 described by the supplier as an installation cost. Ms. Potts does not know whether the company will need to treat this cost as a tax- deductible current expense or as a capital investment. In the latter case, the company could depreciate the $61,000 straight-line ove five years. How will the tax authority's decision affect the after-tax cost of the kiln? The tax rate is 25%, and the opportunity cost of capital is 6%. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Installation cost is expensed at the end of year 1 If installation cost is capitalized and depreciated over 5 years PV Tax shield
Chapter10: Cost Recovery On Property: Depreciation, Depletion, And Amortization
Section: Chapter Questions
Problem 44P
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