Problem:
Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $ 400,000. Of this sum, $ 50,000 is described by the supplier as an installation cost. Ms. Potts does not know whether the Internal Revenue Service ( IRS) will permit the company to treat this cost as a tax- deductible current expense or as a capital investment. In the latter case, the company could depreciate the $ 50,000 using the five- year MACRS tax depreciation schedule. How will the IRS's decision affect the after- tax cost of the kiln? The tax rate is 35% and the opportunity cost of capital is 5%.