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Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $500,000. 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 treat this cost as a tax-deductible current expense or as a capital investment. In the latter case, 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%. (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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