Task: (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%.
Q1. 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%.
Q2. What is the present value of the tax saving if the computers are expensed immediately?
Q3. Would you recommend that Bey expense or capitalize this investment?