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

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Finance

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) 3,000 3,2503,300 3,400 Sales price $17.25 $17.33 $17.45 $18.24 Variable costper unit $8.88 $8.92 $9.03 $9.06 Fixed operating costs exceptdepreciation $12,500 $13,000 $13,220 $13,250 Accelerateddepreciation 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%.
When using accelerated depreciation, the project’s netpresent value (NPV) is . (Hint: Round each element in yourcomputation—including the project’s net present value—to thenearest whole dollar.)
A.16,466
B.18502
C. 20,588
D.23,642
When using straight-line depreciation, the project’s NPVis . (Hint: Again, round each element in your computation—includingthe project’s net present value—to the nearest wholedollar.)
A. 25,485
B. 20,388
C. 23,466
D.19,369
Using the --------- depreciation method will result inthe greater NPV for the project.
A. straight line
B. accelerated
The project will require an initial investment of$10,000, but the project will also be using a company-owned truckthat is not currently being used. This truck could be sold for$14,000, after taxes, if the project is rejected. What should HappyDog Soap do to take this information into account?
Increase the amount of the initial investment by $14,000.
Increase the NPV of the project by $14,000.
The company does not need to do anything with the value of thetruck because the truck is a sunk cost.

Answer & Explanation Solved by verified expert

4.2 Ratings (543 Votes)

NPV using Accelerated Depreciation Year 1 Year 2 Year 3 Year 4 Sales Price per unit 1725 1733 1745 1824 Variable Cost per unit 888 892 903 906 Contribution per unit 837 841 842 918 Number of units sold 3000 3250 3300 3400 Contribution Margin 25110 27333 27786 31212 Fixed Cost 12500 13000 13220 13250 Accelerated Depreciation Expenses 3300 4500 1500 700 Earnings See Answer

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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) 3,000 3,2503,300 3,400 Sales price $17.25 $17.33 $17.45 $18.24 Variable costper unit $8.88 $8.92 $9.03 $9.06 Fixed operating costs exceptdepreciation $12,500 $13,000 $13,220 $13,250 Accelerateddepreciation 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%.When using accelerated depreciation, the project’s netpresent value (NPV) is . (Hint: Round each element in yourcomputation—including the project’s net present value—to thenearest whole dollar.)A.16,466B.18502C. 20,588D.23,642When using straight-line depreciation, the project’s NPVis . (Hint: Again, round each element in your computation—includingthe project’s net present value—to the nearest wholedollar.)A. 25,485B. 20,388C. 23,466D.19,369Using the --------- depreciation method will result inthe greater NPV for the project.A. straight lineB. acceleratedThe project will require an initial investment of$10,000, but the project will also be using a company-owned truckthat is not currently being used. This truck could be sold for$14,000, after taxes, if the project is rejected. What should HappyDog Soap do to take this information into account?Increase the amount of the initial investment by $14,000.Increase the NPV of the project by $14,000.The company does not need to do anything with the value of thetruck because the truck is a sunk cost.