The treasurer of New Semiconductor has a problem. The company has just ordered new assembly robotics for $3,500,000. The manufacturer would install the robotics for an additional $50,000. The treasurer does not know whether the Internal Revenue Service (IRS) will permit the company to treat this installation cost as a tax-deductible expense (end of Year 1) or view the installation as part of the capital investment. In the latter case, the company would capitalize the installation cost and depreciate the $50,000 along with the cost of the robotics according to the 5-year MACRS tax depreciation schedule: Year 1: 20% Year 2: 32% Year 3: 19.2% Year 4: 11.52% Year 5: 11.52% Year 6: 5.76% Assuming the tax rate is 35% and the discount rate is 5%, calculate: 1) the present value of the tax shields if the installation costs are expensed at the end of Year 1, and 2) the present value of the tax shields if the installation costs are capitalized and depreciated according to 5-year MACRS. Oa. PV(Expensed at end of year) = 16,677; PV(Depreciated) = 15,306 O b. PV(Expensed at end of year) = 17,500; PV(Depreciated) = 17,500 Oc. PV(Expensed at end of year) = 15,324; PV(Depreciated) = 14,543 Od. PV(Expensed at end of year) = 14,345; PV(Depreciated) = 12,980
The treasurer of New Semiconductor has a problem. The company has just ordered new assembly robotics for $3,500,000. The manufacturer would install the robotics for an additional $50,000. The treasurer does not know whether the Internal Revenue Service (IRS) will permit the company to treat this installation cost as a tax-deductible expense (end of Year 1) or view the installation as part of the capital investment. In the latter case, the company would capitalize the installation cost and depreciate the $50,000 along with the cost of the robotics according to the 5-year MACRS tax depreciation schedule: Year 1: 20% Year 2: 32% Year 3: 19.2% Year 4: 11.52% Year 5: 11.52% Year 6: 5.76% Assuming the tax rate is 35% and the discount rate is 5%, calculate: 1) the present value of the tax shields if the installation costs are expensed at the end of Year 1, and 2) the present value of the tax shields if the installation costs are capitalized and depreciated according to 5-year MACRS. Oa. PV(Expensed at end of year) = 16,677; PV(Depreciated) = 15,306 O b. PV(Expensed at end of year) = 17,500; PV(Depreciated) = 17,500 Oc. PV(Expensed at end of year) = 15,324; PV(Depreciated) = 14,543 Od. PV(Expensed at end of year) = 14,345; PV(Depreciated) = 12,980
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The treasurer of New Semiconductor has a problem. The company has just ordered new assembly robotics for $3,500,000. The manufacturer would install the
robotics for an additional $50,000. The treasurer does not know whether the Internal Revenue Service (IRS) will permit the company to treat this installation cost as
a tax-deductible expense (end of Year 1) or view the installation as part of the capital investment. In the latter case, the company would capitalize the installation
cost and depreciate the $50,000 along with the cost of the robotics according to the 5-year MACRS tax depreciation schedule:
Year 1: 20%
Year 2: 32%
Year 3: 19.2%
Year 4: 11.52%
Year 5: 11.52%
Year 6: 5.76%
Assuming the tax rate is 35% and the discount rate is 5%, calculate:
1) the present value of the tax shields if the installation costs are expensed at the end of Year 1, and
2) the present value of the tax shields if the installation costs are capitalized and depreciated according to 5-year MACRS.
a. PV(Expensed at end of year) = 16,677; PV(Depreciated) = 15,306
O b. PV(Expensed at end of year) = 17,500; PV(Depreciated) = 17,500
Oc. PV(Expensed at end of year) = 15,324; PV(Depreciated) = 14,543
O d. PV(Expensed at end of year) = 14,345; PV(Depreciated) = 12,980
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