Steel manufacturer V&M Star announced in early 2010 that it would spend $650 million to expand its Youngstown, Ohio, plant. The company indicated that funding from the federal government’s stimulus bill, passed in response to the 2008-2009 recession, played an instrumental role in its decision to expand its existing facilities.
REQUIRED:
a. What issues must be considered when deciding whether to capitalize or expense the $650 million?
b. Under what conditions could the $650 million cost be expensed even if it improved instead of maintained the plant?
c. Assume that the $650 million cost is capitalized and that the expenditure extends the useful life of the existing facility. Explain how V&M will compute depreciation on its initial facility over its remaining useful life.