Question

Companies invest in expansion projects with the expectation of increasing the earnings of its business.

Consider the case of Yeatman Co.:

Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:

	Year 1	Year 2	Year 3	Year 4
Unit sales	5,500	5,200	5,700	5,820
Sales price	$42.57	$43.55	$44.76	$46.79
Variable cost per unit	$22.83	$22.97	$23.45	$23.87
Fixed operating costs except depreciation	$66,750	$68,950	$69,690	$68,900
Accelerated depreciation rate	33%	45%	15%	7%

This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Yeatman pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be when using accelerated depreciation. (Note: Round your answer to the nearest whole dollar.)

A.) $87,280

B.) $75,896

C.) $68,306

D.) $91,075

Now determine what the project’s NPV would be when using straight-line depreciation. (Note: Round your answer to the nearest whole dollar.)   

A.) $75,554

B.) $98,220

C.) $94,443

D.) $86,887

The____________depreciation method will result in the highest NPV for the project.

A.) Accelerated

B.) Straight-line

No other firm would take on this project if Yeatman turns it down. How much should Yeatman reduce the NPV of this project if it discovered that this project would reduce one of its division’s net after-tax cash flows by $600 for each year of the four-year project? (Note: Round your answer to the nearest whole dollar.)

A.) $1,396

B.) $1,861

C.) $1,582

D.) $2,047

The project will require an initial investment of $20,000, but the project will also be using a company-owned truck that is not currently being used. This truck could be sold for $4,000, after taxes, if the project is rejected. What should Yeatman do to take this information into account?

A.) Increase the amount of the initial investment by $4,000.

B.) Increase the NPV of the project by $4,000.

C.) The company does not need to do anything with the value of the truck because the truck is a sunk cost.

Answer 1

Based on the given data, pls find below steps, workings and answers:

The NPV using the Accelerated depreciation method : is B) $ 75896

The NPV using the Straight line depreciation method : is A) $ 75554

The (A) Accelerated method result in highest NPV for the Project

If it discovered that this project would reduce one of its division’s net after-tax cash flows by $600 for each year of the four-year project, the NPV reduce by (B) $ 1861

Since there is an Opportunity Loss, A.) Increase the amount of the initial investment by $4,000.