Chapter 6, Problem 19PS

Depreciation and project NPV Ms. T. Potts, the treasurer of Ideal China, has a problem. The company 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 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 $50,000 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%.