Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed...

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Finance

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 $20,000 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.
$61,554
$58,989
$41,036
$51,295
Now determine what the project’s NPV would be when usingstraight-line depreciation $ -----------------
Using the --------------------------- depreciation method willresult in the highest 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 $500 for each year of the four-yearproject?
$1,706
$1,551
$931
$1,318
The project will require an initial investment of $20,000, butthe project will also be using a company-owned truck that is notcurrently being used. This truck could be sold for $9,000, aftertaxes, if the project is rejected. What should Yeatman do to takethis information into account?
The company does not need to do anything with the value of thetruck because the truck is a sunk cost.
Increase the NPV of the project by $9,000.
Increase the amount of the initial investment by $9,000.

	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

Answer & Explanation Solved by verified expert

3.9 Ratings (676 Votes)

1 NPV 51295 Formula Year n 0 1 2 3 4 Unit sales u 4800 5100 5000 5120 Sales price per unit p 2233 2345 2385 2445 Variable cost per unit vc 945 1085 1195 1200 Fixed operating costs FC 32500 33450 34950 34875 up Sales S 107184 119595 119250 125184 uvc Variable cost VC 45360 55335 59750 61440 Fixed cost FC 32500 33450 34950 34875 100 dep At the time of purchase Depreciation D 20000 S VC FC D EBIT 20000 See Answer

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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 $20,000 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.$61,554$58,989$41,036$51,295Now determine what the project’s NPV would be when usingstraight-line depreciation $ -----------------Using the --------------------------- depreciation method willresult in the highest 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 $500 for each year of the four-yearproject?$1,706$1,551$931$1,318The project will require an initial investment of $20,000, butthe project will also be using a company-owned truck that is notcurrently being used. This truck could be sold for $9,000, aftertaxes, if the project is rejected. What should Yeatman do to takethis information into account?The company does not need to do anything with the value of thetruck because the truck is a sunk cost.Increase the NPV of the project by $9,000.Increase the amount of the initial investment by $9,000.