Molton Inc. made a $60,000 cash expenditure this year (year 0). Use Appendix A of your textbook provided to compute the after-tax cost if Molton must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Molton has a 21% marginal tax rate and uses a 7% discount rate.

Question

Quizplus · Accepted Answer

Step 1: Calculate the PV of the capitalized expenditure
PV = expenditure / ((1 + r) ^ n)
PV = 60,000 / ((1 + 0.07) ^ 3)
PV = $48,206.41

Step 2: Calculate the after-tax cost
ATC = PV x (1 - tax rate)
ATC = $48,206.41 x (1 - 0.21)
ATC = $38,024.32

Step 3: Add back the tax savings from amortization
Amortization expense = expenditure / n
Amortization expense = $60,000 / 3
Amortization expense = $20,000

Tax savings from amortization = amortization expense x tax rate
Tax savings from amortization = $20,000 x 0.21
Tax savings from amortization = $4,200

ATC = $38,024.32 + $4,200
ATC = $42,224.32

Therefore, the after-tax cost is $42,224.32, which is closest to answer choice B, $48,206.