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2 years ago

What is the present value of the cost of the kiln if the installation cost is treated as a separate current expense

Business

1 answer:

Temka [501]2 years ago

5 0

Answer: ,$446,600

Explanation:

Here is the complete question:

Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $464,000. Of this sum, $58,000 is described by the supplier as an installation cost. Ms. Potts does not know whether the Internal Revenue Service (IRS) will permit the company to treat this cost as a tax-deductible current expense or as a capital investment. In the latter case, the company could depreciate the $58,000 straight-line over 5 years. The tax rate is 30% and the opportunity cost of capital is 5%.

What is the present value of the cost of the kiln if the installation cost is treated as a separate current expense?

The depreciation expense is simply the decrease in an asset's cost due to its usage. For the straight-line depreciation, the cost of the asset is written off evenly over the entire economic life of the asset.

present value of the cost of the kiln if the installation cost is treated as a separate current expense is calculated as: the difference between the cost of the kiln and the tax shield on the expense of the installation costs. This will be:

= $464,000 - ($58,000 × 30%)

= $464,000 - ($58,000 × 0.3)

= $464,000 - $17,400

= $446,600

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