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)