Question

Suppose a firm is considering a business expasion plan, which requires some initial capital investment. This plan could be implemented in county A and county B.
Assume the two couties are idential so the sales, cost, and risk associated with the project are the same, except their tax rules.
In county A, capital expenditures must be depreciated over the life of the project. In country B, the capital expenditures could be expensed immediately.
If you are the financial manager, which county will you choose, A or B? Explain the reason.

Answer 1

I will be SELECTING COUNTRY B because I can take the benefit of the capital expenditure as depreciation in the initial year itself and it will be providing me with the most benefit due to the application of the concept of time value of money and when I am trying to take the benefit of the depreciation in the first year itself, it will be providing me with the optimum benefits in having the tax deduction and it will also help the company order to increase their overall benefits when there will be a lower decline in the overall capital expenditure benefit of depreciation when they are discounted at the present value in the initial year.

In the other country A, capital expenditure is depreciated over the life of the Asset and it will mean that there will not be the benefits associated with time value of money concept because these benefits will get lower due to higher time period and hence I will be selecting country B, because it will allow me to claim all my depreciation in the first year itself and it will be helping me in realising most benefit due to lesser reduction in benefit as per the time value of money concept.