The company has just ordered a new kiln for $480,000. Of this sum, $58,000 is de
ID: 2778357 • Letter: T
Question
The company has just ordered a new kiln for $480,000. Of this sum, $58,000 is described by the supplier as an installation cost. The company does not know whether the Internal Revenue Service (IRS) will permit to treat this cost as a tax-deductible first-year expense or as a capital investment.
In the latter case, the company could depreciate the $58,000 using the five-year MACRS tax depreciation schedule. Assume the tax rate is 35% and the opportunity cost of capital is 8%.
Calculate the value of the tax shield 1 and tax shield 2. (Note: Use Tax shield 1 as an expense treatment and tax shield 2 as 5 year MACRS.) (Do not round intermediate calculations. Round your answers to the nearest dollar amount.)
Solve for Tax shield 1 $
Solve for Tax shield 2 $
Explanation / Answer
Tax shield 1 as an expense treatment
we consider installation cost of new kiln is as expense of revenue expenditure which is deductible for tax purpose.
Therefore, $58000 will be charged to Profit and Loss Account for the year and only $ 480000 of new kiln will be shown as fixed assets in Balance sheet as on year ended.
Tax Shield 2 as 5 year MACRS :
year depreciation for current year 0 0 1 $ (11600 * 0.20) 2320 2 $ (11600 * 0.32) 3712 3 $ (11600 * 0.192) 2227 4 $ (11600 * 0.1152) 1336 5 $ (11600 * 0.1152) 1336 6 $ (11600 * 0.0576) 668 Total depreciation $ 11599