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, in which capital expenditure could be expensed immediately because when the capital expenditure is expensed immediately it will be providing with higher benefit due to time value of money concept because when a company is claiming its expenditure completely at the current value it will be having a higher amount of benefit because these benefits will not be reduced over the time due to time value of money concept and hence these benefits will be maximum to the company because capital expenditures will be reducing the overall taxation of the company so these benefits of capital expenditure would be leading to most advantage when they are expensed immediately and hence I will be selecting country B.

I will not be selecting country A because capital expenditures are depreciated over the life of the project and hence the benefits which will be accruing to the company will be getting depreciated due to time value of money concept and hence I will be selecting country B because the benefit of depreciation will be highest as it will provide me with the time value of money concept benefit.