2. Analysis of an expansion project

Yeatman 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 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 $25,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Yeatman pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be when using accelerated depreciation.

Question: Determine what the project's net present value (NPV) would be when using accelerated depreciation. (Note: Round your intermediate calculations to the nearest whole number.)

$65,279

$83,412

$58,026

$72,532

Question: Now determine what the project's NPV would be when using straight-line depreciation.

82,921

72,105

68,500

90,131

Question: Using the accelerated or straight? line depreciation method will result in the highest NPV for the project.

Question: No other firm would take on this project if Yeatman turns it down. How much should Yeatman reduce the NPV of this project if it discovered that this project would reduce one of its division's net after-tax cash flows by $300 for each year of the four-year project?

$559

$698

$791

$931