Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $580,000. Of this sum, $68,000 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 $68,000 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%. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Answer is complete but not entirely correct. PV Tax shield Installation cost is expensed at the end of year 1 If installation cost is capitalized and depreciated over 5 years | . LA LA $ 15,741 13,575 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 $580,000. Of this sum, $68,000 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 $68,000 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%. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Answer is complete but not entirely correct. PV Tax shield Installation cost is expensed at the end of year 1 If installation cost is capitalized and depreciated over 5 years | . LA LA $ 15,741 13,575 After-tax cost is smaller After-tax cost is larger
Chapter5: Gross Income: Exclusions
Section: Chapter Questions
Problem 44P
Related questions
Question
Transcribed Image Text:Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $580,000. Of this sum, $68,000
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 $68,000 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%.
Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.
> Answer is complete but not entirely correct.
PV Tax shield
15,741✔ After-tax cost is smaller
13,575X After-tax cost is larger
Installation cost is expensed at the end of year 1
If installation cost is capitalized and depreciated over 5 years
$
$
33
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 5 images
Recommended textbooks for you