Assess Asset Writeoff versus Capitalization: HighPotential Corporation made a $5,000 investment in equipment that qualifies for a three-year straight-line tax depreciation write-off. The financial manager of High Potential indicated that there is a tax policy that allows the company to write off 90 percent of this investment against current period income rather than take the depreciation. Your recommendation will be followed by the company. The company has a marginal tax rate of 40 percent and an after-tax cost of capital of 20 percent.

Required:

a. Compute the internal rate of return for the write-off.

b. Make your recommendation and offer supporting comments.