Steel manufacturer V&M Star announced in early 2010 that it would spend $650 million to expand its Youngstown, Ohio, plant. The company indicated that funding from the federal government’s stimulus bill, passed in response to the 2008–2009 recession, played an instrumental role in its decision to expand its existing facilities.
a. What issues must be considered when deciding whether to capitalize or expense the $650 million?
b. Under what conditions could the $650 million cost be expensed even if it improved instead of maintained the plant?
c. Assume that the $650 million cost is capitalized and that the expenditure extends the useful life of the existing facility. Explain how V&M will compute depreciation on its initial facility over its remaining useful life.
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