Regarding expensing an asset\'s cost immediately versus capitalizing the cost an

Question

Regarding expensing an asset's cost immediately versus capitalizing the cost and depreciating it over time: All else the same, given a choice, a tax paying firm would generally prefer to:

A. Capitalize the cost & depreciate, because the will make the current year's net income higher.

B. Capitalize the cost & depreciate, because it is besd to extend the depreciation tax shield into the future as much as possible.

C. Expense the asset to capture the tax shield immediately and thereby maximize the PV of the tax shield.

D. Expense the asset to maximize the current year's net income.

E. None of the above.

Explanation / Answer

Regarding expensing an asset's cost immediately versus capitalizing the cost and depreciating it over time: All else the same, given a choice, a tax paying firm would generally prefer to:

ANSWER:B. Capitalize the cost & depreciate, because it is besd to extend the depreciation tax shield into the future as much as possible.

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