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How will tax authority decision affect the after-tax cost

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Question - Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $440,000. Of this sum, $54,000 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 $54,000 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 4%. What is the PV tax shield?

Reference no: EM133050774

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