[lindjlny]

Does anybody know if training, shipping and installation costs are included in the total initial investment when computing the depreciation tax shield for the payback period. The question I’m working on doesn’t include it, but I’m not sure if its an error. It doesn’t mention it in the book. I’m confused because I know you have to include it when figuring out the tax shield for capital budget analysis. Any help would be appreciated.

Question:

Barclay Corporation invested $600,000 in a capital project, including 40,000 in installation charges. The project had a useful life of 12 years with no salvage value and generated cash flows of 150,000 each year. Assuming a 30% tax rate and straight-line depreciation for tax purposes, Barclay’s after-tax cash flows per year would have been equal to:

[Synergiex]

Yes you do include those kind of expenses while computing the depreciation tax shield. Actually it includes in that question too. Notice the wording “INCLUDING 40000 in installation charges.” So it is already included in the 600,000 and you dont need to add another 40,000…

B - 7/1/2011 ---------> 85
R - 7/28/2011 ---------> 77!!!
A - 10/30/2011---------> 83
F - 11/26/2012 --------> 85

[rknight21]

you should provide more info. what are the options for the asnwer and whats the actual answer.to me it seems they are saying the 40,000 is already included in the 600,000

[mnCPAwannabe]

Yes, you include it when computing payback period. As far as whether its already included depends on the question. If its phrased like your question then the costs are already part of the 600,000. However they may say, “Barclays spent 600,000 on the machine, and an additional 50,000 on shipping and installation.” In that case the total would be 650,000.

FAR: 84
AUD: 95
REG: 78
BEC: 88
ETHICS: 100

[lindjlny]

Thank you!

[Author]

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