Ms. T Potts, the treasurer of

Ms. T Potts, the treasurer of Ideal China, has a problem. The
company just ordered a new kiln for $400,000. Of this sum, $60,000
is described by the supplier as an installation cost. Ms. Potts
does not know whether the company will need to (1) treat this cost
as a tax-deductible current expense or (2) as a capital investment.
In case (1), the installation cost is expensed at the end of year
1. In case (2), the company could depreciate the $60,000
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 5%. Find the present
value of the tax shields for case 1 and case 2 (PV1, PV2) .
($11905, $10824) ($12500, $10824) ($14286, $12988) ($12988, $15000)
($12301, $14019)

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Ms. T. Potts, the treasurer of

Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $530,000. Of this sum, $63,000 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 $63,000 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.)

PV Tax shield
Installation cost is expensed at the end of year 1
If installation cost is capitalized and depreciated over 5 years

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