Calculating Project NPV You have been appointed by a retail store as its new financial manager. The firm has opened a new store in the south of France that is specifically targeted at holiday makers. The firm has decided that it will install a rotisserie which allows customers to directly pick cooked chickens to eat. The cost of the rotisserie is €37,000. Because the food is made on the premises, the store must pay a one-off insurance fee of €8,000 to avoid any liability from food poisoning.

The chief executive has asked you to deal with the transaction. Should you include the insurance fee as capital investment or is it an expense? The tax rate is 33.3 per cent and the relevant discount rate is 12 per cent. If the insurance is treated as a capital investment cost, what is the present value of tax savings using a depreciation method of 20 per cent reducing balance? Assume that the rotisserie will be scrapped for nothing in 5 years. Which is better for the store: treating the insurance cost as a capital investment or as an expense?