Cate Rzasa, great-granddaughter of the founder of Rzasa Tile Products and current president of the company, believes in simple, conservative accounting. In keeping with her philosophy, she has decreed that the company shall use alternative straight-line depreciation, based on the MACRS class lives, for all newly acquired assets. Your boss, the financial vice-president and the only nonfamily officer, has asked you to develop an exhibit that shows how much this policy costs the company in terms of market value.
Rzasa is interested in increasing the value of the firm's stock because she fears a family stockholder revolt that might remove her from office. For your exhibit, assume that the company spends $100 million each year on new capital projects, that the projects have on average a 10-year class life, that the company has a 9 percent cost of debt, and that its tax rate is 35 percent.