Question
In: Finance
Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider...
Companies invest in expansion projects with the expectation of increasing the earnings of its business.
Consider the case of McFann Co.:
McFann 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 | 3,000 | 3,250 | 3,300 | 3,400 |
| Sales price | $17.25 | $17.33 | $17.45 | $18.24 |
| Variable cost per unit | $8.88 | $8.92 | $9.03 | $9.06 |
| Fixed operating costs except depreciation | $12,500 | $13,000 | $13,220 | $13,250 |
| 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. McFann 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. $11,066
B. $13,832
C. $15,907
D. $12,449
Now determine what the project’s NPV would be when using straight-line depreciation. (Note: Round your answer to the nearest whole dollar.) ___________
A. $12,816
B. $16,863
C. $15513
D. $13,490
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 McFann turns it down. How much should McFann 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. $1,582
B. $1,396
C. $1,861
D. $1,117
McFann spent $2,500 on a marketing study to estimate the number of units that it can sell each year. What should McFann do to take this information into account?
A. The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost.
B. Increase the NPV of the project $2,500.
C. Increase the amount of the initial investment by $2,500.
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider...
Companies invest in expansion projects with the expectation of
increasing the earnings of its business.
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Yeatman Co. is considering an investment that will have the
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Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider...
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Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider...
Companies invest in expansion projects with the expectation of
increasing the earnings of its business.
Consider the case of McFann Co.:
McFann 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
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Fixed operating costs
$66,750
$68,950
$69,690
$68,900
This project will require an investment...
Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider...
Companies invest in expansion projects with the expectation of
increasing the earnings of its business.
Consider the case of Falcon Freight:
Falcon Freight 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 (units)
3,000
3,250
3,300
3,400
Sales price
17.25
17.33
17.45
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Variable cost per unit
8.88
8.92
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9.06
Fixed operating costs except
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$12,500
$13,000
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Accelerated depreciation rate...
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Year 2
Year 3
Year 4
Unit sales
4,200
4,100
4,300
4,400
Sales price
$29.82
$30.00
$30.31
$33.19
Variable cost per unit
$12.15
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$14.02
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Fixed operating costs except depreciation
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Year 3
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3,250
3,300
3,400
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$17.25
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Variable cost per unit
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$13,000
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Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider...
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increasing the earnings of its business.
Consider the case of Garida Co.:
Garida Co. is considering an investment that will have the
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Year 2
Year 3
Year 4
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5,100
5,000
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Variable cost per unit
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$10.85
$11.95
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depreciation $12,500 $13,000 $13,220 $13,250 Accelerated...
Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider...
Companies invest in expansion projects with the expectation of
increasing the earnings of its business.
Consider the case of McFann Co.:
McFann 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
3,500
4,000
4,200
4,250
Sales price
$38.50
$39.88
$40.15
$41.55
Variable cost per unit
$22.34
$22.85
$23.67
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Fixed operating costs except depreciation
$37,000
$37,500
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Accelerated depreciation rate
33%...
Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider...
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4,200 4,250 Sales price $38.50 $39.88 $40.15 $41.55 Variable cost
per unit $22.34 $22.85 $23.67 $23.87 Fixed operating costs except
depreciation $37,000 $37,500 $38,120 $39,560 Accelerated
depreciation rate...
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