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

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Finance

Companies invest in expansion projects with the expectation ofincreasing the earnings of its business.
Consider the case of Yeatman Co.:
Yeatman Co. is considering an investment that will have thefollowing 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 newequipment. Under the new tax law, the equipment is eligible for100% bonus deprecation at t = 0, so it will be fully depreciated atthe time of purchase. The equipment will have no salvage value atthe end of the project’s four-year life. Yeatman pays a constanttax rate of 25%, and it has a weighted average cost of capital(WACC) of 11%. Determine what the project’s net present value (NPV)would be under the new tax law.
Determine what the project’s net present value (NPV) would beunder the new tax law.
A. $52,916
B. $58,795
C. $47,036
D. $67,614
Now determine what the project’s NPV would be when usingstraight-line depreciation.
Using the ____________ depreciation method will result in thehighest NPV for the project.
No other firm would take on this project if Yeatman turns itdown. How much should Yeatman reduce the NPV of this project if itdiscovered that this project would reduce one of its division’s netafter-tax cash flows by $600 for each year of the four-yearproject?
A. $1,861
B. $1,117
C. $1,396
D. $1,582
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 $18,000, aftertaxes, if the project is rejected. What should Yeatman do to takethis information into account?
A. Increase the NPV of the project by $18,000.
B. Increase the amount of the initial investment by $18,000.
C. The company does not need to do anything with the value ofthe truck because the truck is a sunk cost.

	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

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Companies invest in expansion projects with the expectation ofincreasing the earnings of its business.Consider the case of Yeatman Co.:Yeatman Co. is considering an investment that will have thefollowing sales, variable costs, and fixed operating costs:Year 1Year 2Year 3Year 4Unit sales4,8005,1005,0005,120Sales price$22.33$23.45$23.85$24.45Variable cost per unit$9.45$10.85$11.95$12.00Fixed operating costs$32,500$33,450$34,950$34,875This project will require an investment of $10,000 in newequipment. Under the new tax law, the equipment is eligible for100% bonus deprecation at t = 0, so it will be fully depreciated atthe time of purchase. The equipment will have no salvage value atthe end of the project’s four-year life. Yeatman pays a constanttax rate of 25%, and it has a weighted average cost of capital(WACC) of 11%. Determine what the project’s net present value (NPV)would be under the new tax law.Determine what the project’s net present value (NPV) would beunder the new tax law.A. $52,916B. $58,795C. $47,036D. $67,614Now determine what the project’s NPV would be when usingstraight-line depreciation. Using the ____________ depreciation method will result in thehighest NPV for the project.No other firm would take on this project if Yeatman turns itdown. How much should Yeatman reduce the NPV of this project if itdiscovered that this project would reduce one of its division’s netafter-tax cash flows by $600 for each year of the four-yearproject?A. $1,861B. $1,117C. $1,396D. $1,582The 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 $18,000, aftertaxes, if the project is rejected. What should Yeatman do to takethis information into account?A. Increase the NPV of the project by $18,000.B. Increase the amount of the initial investment by $18,000.C. The company does not need to do anything with the value ofthe truck because the truck is a sunk cost.