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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	4,800	5,100	5,000	5,120
Sales price	$22.33	$23.45	$23.85	$24.45
Variable cost per unit	$9.45	$10.85	$11.95	$12.00
Fixed operating costs	$32,500	$33,450	$34,950	$34,875

This project will require an investment of $10,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the projects four-year life. McFann pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the projects net present value (NPV) would be under the new tax law.

Which of the following most closely approximates what the projects net present value (NPV) would be under the new tax law?(Hint: Round your final answer to two decimal places and choose the value that most closely matches your answer.)

1. $58,793.82

2. $47,035.06

3. $70,552.58

4. $52,914.44

Which of the of the following most closely approximates what the projects NPV would be when using straight-line depreciation? (Hint: Round your final answer to two decimal places and choose the value that most closely matches your answer.)

$66,967.78

$55,321.21

$72,791.06

$58,232.85

Using which depreciation method will result in the highest NPV for the project.

1. bonus

2. straight line

No other firm would take on this project if McFann turns it down. Which of the following most closely approximates how much McFann should reduce the NPV of this project, assuming it is discovered that this project would reduce one of its divisions net after-tax cash flows by $400 for each year of the four-year project? (Hint: Round your final answer to two decimal places and choose the value that most closely matches your answer.)

1. $1,240.98

2. $930.74

3. $1,365.08

4. $744.59

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?

1. Increase the amount of the initial investment by $2,500.

2. Increase the NPV of the project $2,500.

3. The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost.

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