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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. 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.)

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Ee 345.

Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $656,000. Of this sum, $82,000 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 $82,000 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 $ (634,699)
Transcribed Image Text:Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $656,000. Of this sum, $82,000 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 $82,000 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 $ (634,699)
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