Delish Restaurants has assets worth $50 million. If these assets are destroyed, Delish plans to replace them at a cost of $50 million. Delish uses the straight-line depreciation method and the assets have a two-year depreciable lifespan. For tax purposes, the assets have already been depreciated to zero. Assume the probability the assets will be destroyed during the coming year equals 0.05, the income tax rate is 34%, and the capital gains tax rate is 28%. Calculate the expected tax shield generated from the property in the coming year and future years if:
A) Delish plans to use internal funds to finance replacement of the property in the event it is destroyed.
B) The company purchases replacement cost insurance for a premium of $2.5 million and plans to recognize a capital gain if the insurance proceeds are used to replace the property.
C) Delish purchases replacement cost insurance for a premium of $2.5 million and plans to defer the capital gain if the insurance proceeds are used to replace the property.