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What is the present value of the depreciation tax

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?

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Finance Basics: What is the present value of the depreciation tax

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