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Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered...

Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $432,000. Of this sum, $54,000 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 $54,000 straight-line over 5 years. The tax rate is 30% and the opportunity cost of capital is 5%.

a. What is the present value of the cost of the kiln if the installation cost is treated as a separate current expense?

b. What is the present value of the cost of the kiln if the installation cost is treated as a part of the capital investment?

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