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How will the IRS’s decision affect the after- tax costMs. 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%.