3. Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the...

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3. Analysis of an expansion project
Companies invest in expansion projects with the expectation ofincreasing the earnings of its business. Consider the case of HappyDog Soap: Happy Dog Soap is considering an investment that willhave the following sales, variable costs, and fixed operatingcosts:
Year 1 Year 2 Year 3 Year 4
Unit sales (units) 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 $10,000 in newequipment. The equipment will have no salvage value at the end ofthe project’s four-year life. Happy Dog Soap pays a constant taxrate of 40%, and it has a required rate of return of 11%. Whenusing accelerated depreciation, the project’s net present value(NPV) is . (Hint: Round each element in yourcomputation—including the project’s net present value—to thenearest whole dollar.) When using straight-line depreciation, theproject’s NPV is . (Hint: Again, round each elementin your computation—including the project’s net present value—tothe nearest whole dollar.) Using the ___depreciationmethod will result in the greater NPV for the project.
No other firm would take on this project if Happy Dog Soap turnsit down. How much should Happy Dog Soap reduce the NPV of thisproject if it discovered that this project would reduce one of itsdivision’s net after-tax cash flows by $300 for each year of thefour-year project?
$559
$931
$791
$1,024
The project will require an initial investment of $10,000, butthe project will also be using a company-owned truck that is notcurrently being used. This truck could be sold for $12,000, aftertaxes, if the project is rejected. What should Happy Dog Soap do totake this information into account?

-Increase the NPV of the project by $12,000.
-The company does not need to do anything with the value of thetruck because the truck is a sunk cost.
-Increase the amount of the initial investment by $12,000.

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3. Analysis of an expansion projectCompanies invest in expansion projects with the expectation ofincreasing the earnings of its business. Consider the case of HappyDog Soap: Happy Dog Soap is considering an investment that willhave the following sales, variable costs, and fixed operatingcosts:Year 1 Year 2 Year 3 Year 4Unit sales (units) 5,500 5,200 5,700 5,820Sales price $42.57 $43.55 $44.76 $46.79Variable cost per unit $22.83 $22.97 $23.45 $23.87Fixed operating costs except depreciation $66,750 $68,950 $69,690$68,900Accelerated depreciation rate 33% 45% 15% 7%This project will require an investment of $10,000 in newequipment. The equipment will have no salvage value at the end ofthe project’s four-year life. Happy Dog Soap pays a constant taxrate of 40%, and it has a required rate of return of 11%. Whenusing accelerated depreciation, the project’s net present value(NPV) is . ____________(Hint: Round each element in yourcomputation—including the project’s net present value—to thenearest whole dollar.) When using straight-line depreciation, theproject’s NPV is______________ . (Hint: Again, round each elementin your computation—including the project’s net present value—tothe nearest whole dollar.) Using the _____________depreciationmethod will result in the greater NPV for the project.No other firm would take on this project if Happy Dog Soap turnsit down. How much should Happy Dog Soap reduce the NPV of thisproject if it discovered that this project would reduce one of itsdivision’s net after-tax cash flows by $300 for each year of thefour-year project?$559$931$791$1,024The project will require an initial investment of $10,000, butthe project will also be using a company-owned truck that is notcurrently being used. This truck could be sold for $12,000, aftertaxes, if the project is rejected. What should Happy Dog Soap do totake this information into account?-Increase the NPV of the project by $12,000.-The company does not need to do anything with the value of thetruck because the truck is a sunk cost.-Increase the amount of the initial investment by $12,000.