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Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $430,000. Of this sum, $53,000 is 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 $53,000 straight-line over 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 8%. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Answer is complete but not entirely correct. Installation cost is expensed at the end of year 1 If installation cost is capitalized and depreciated over 5 years $ $ PV Tax shield After tax cost is smaller After tax cost is larger Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $430,000. Of this sum, $53,000 is 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 $53,000 straight-line over 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 8%. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Answer is complete but not entirely correct. Installation cost is expensed at the end of year 1 If installation cost is capitalized and depreciated over 5 years $ $ PV Tax shield After tax cost is smaller After tax cost is larger
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Related Book For
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
Posted Date:
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