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    Capitalizing versus Expensing

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    (Capitalizing versus expensing)

    BeyTravel Agency is a small firm owned by David Bey that has just purchased $20,000 worth of computer upgrades. Under current tax laws, Bey has a choice of expensing or depreciating a small investment such as this. Bey's marginal tax rate is 40%.

    a. What is the present value of the depreciation tax shield if the computers are depreciated
    straight line over the next five years? The cost of capital is 10%.
    b. What is the present value of the tax saving if the computers are expensed immediately?
    c. Would you recommend that Bey expense or capitalize this investment?

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    Solution Summary

    The solution decides where to capitalize or expense computer upgrades.