Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered...

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Ms. T. Potts, the treasurer of Ideal China, has a problem. Thecompany has just ordered a new kiln for $400,000. Of this sum,$50,000 is described by the supplier as an installation cost. Ms.Potts does not know whether the Internal Revenue Service (IRS) willpermit the company to treat this cost as a tax-deductible currentexpense or as a capital investment. In the latter case, the companycould depreciate the $50,000 using the five-year MACRS taxdepreciation schedule. The tax rate is 35% and the opportunity costof capital is 5%.
a. What is the present value of the cost of thekiln if the installation cost is treated as a separate currentexpense?

b. What is the present value of the cost of thekiln if the installation cost is treated as a part of the capitalinvestment? (Round your answers to the nearest whole dollaramount.)

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4.3 Ratings (564 Votes)

Under MACRS method of 5 years the rate of depreciation 1st year 20 2nd year 32 3rd year 1920 4th year 1152 5th year 1152 6th year 576 Answer 1 PV of cost of Kiln when installation cost is treated as a separate current expense It is computed in excel sheet which is given below Year See Answer

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Ms. T. Potts, the treasurer of Ideal China, has a problem. Thecompany has just ordered a new kiln for $400,000. Of this sum,$50,000 is described by the supplier as an installation cost. Ms.Potts does not know whether the Internal Revenue Service (IRS) willpermit the company to treat this cost as a tax-deductible currentexpense or as a capital investment. In the latter case, the companycould depreciate the $50,000 using the five-year MACRS taxdepreciation schedule. The tax rate is 35% and the opportunity costof capital is 5%.a. What is the present value of the cost of thekiln if the installation cost is treated as a separate currentexpense?b. What is the present value of the cost of thekiln if the installation cost is treated as a part of the capitalinvestment? (Round your answers to the nearest whole dollaramount.)