The Weber-Decker Co. just paid $1 million in cash for a building as part of a new
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The Weber-Decker Co. just paid $1 million in cash for a building as part of a new capital budgeting project. This entire $1 million is an immediate cash outflow. However, assuming straight-line depreciation over 20 years, only $50,000 ( = $1 million / 20 ) is considered an accounting expense in the current year. Current earnings are thereby reduced by only $50,000 (less the depreciation tax shield). The remaining $950,000 is expensed over the following 19 years. For capital budgeting purposes, the relevant cash outflow at Year 0 is the full $1 million, not the reduction in earnings of only $50,000.
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Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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