Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $400,000. Of this sum, $50,000 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 $50,000 straight-line over 5 years. The tax rate is 30% and the opportunity cost of capital is 5%. What is the present value of the cost of the kiln if the installation cost is treated as a separate current expense? What is the present value of the cost of the kiln if the installation cost is treated as a part of the capital investment? Note: Round your answer to the nearest whole dollar amo
Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $400,000. Of this sum, $50,000 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
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What is the present value of the cost of the kiln if the installation cost is treated as a separate current expense?
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What is the present value of the cost of the kiln if the installation cost is treated as a part of the capital investment?
Note: Round your answer to the nearest whole dollar amount.
Definition of Straight Line Method
A depreciation expense refers to a fall in the cost of the asset because of its continuous usage and various other wear and tear. there are several methods to compute depreciation in which one of them is straight-line depreciation which writes off the cost of the asset evenly over its economic life of the asset.
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