Question
Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $464,000. Of this sum, $58,000
Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $464,000. Of this sum, $58,000 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 $58,000 using the five-year MACRS tax depreciation schedule. The tax rate is 40% 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?
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 answers to the nearest whole dollar amount.)
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