Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $560,000. Of this sum, $70,000 Is described by the supplier as an installation cost. Ms. Potts does not know whether the Internal Revenue Service (IRS) will permit the company to treat this cost as a tax-deductible current expense or as a capital investment In the latter case, the company could depreciate the $70,000 straight-line over 5 years. The tax rate is 30% and the opportunity cast of capital Is 5%. a. What is the present value of the cost of the kiln if the installation cost is treated as a separate current expense? b. What is the present value of the cost of the kiln if the installation cost is treated as a part of the capital Investment? (Round your answer to the nearest whole dollar amount.) a. Present value b. Present value
Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $560,000. Of this sum, $70,000 Is described by the supplier as an installation cost. Ms. Potts does not know whether the Internal Revenue Service (IRS) will permit the company to treat this cost as a tax-deductible current expense or as a capital investment In the latter case, the company could depreciate the $70,000 straight-line over 5 years. The tax rate is 30% and the opportunity cast of capital Is 5%. a. What is the present value of the cost of the kiln if the installation cost is treated as a separate current expense? b. What is the present value of the cost of the kiln if the installation cost is treated as a part of the capital Investment? (Round your answer to the nearest whole dollar amount.) a. Present value b. Present value
Chapter3: Income Sources
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Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $560,000. Of this sum, $70,000
Is described by the supplier as an installation cost. Ms. Potts does not know whether the Internal Revenue Service (IRS) will permit the
company to treat this cost as a tax-deductible current expense or as a capital investment. In the latter case, the company could
depreciate the $70,000 straight-line over 5 years. The tax rate is 30% and the opportunity cost of capital is 5%.
a. What is the present value of the cost of the kiln if the installation cost is treated as a separate current expense?
b. What is the present value of the cost of the kiln if the installation cost is treated as a part of the capital investment? (Round your
answer to the nearest whole dollar amount.)
a.
Present value
b.
Present value
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