(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?
The solution decides where to capitalize or expense computer upgrades.