$3.$ Analysis of an expansion project

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

Consider the case of Fox Co$.$:

Fox 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 $3,5004,0004,2004,250$

Sales price $$38\mathrm{.}50$ $$39\mathrm{.}88$ $$40\mathrm{.}15$ $$41\mathrm{.}55$

Variable cost per unit $$22\mathrm{.}34$ $$22\mathrm{.}85$ $$23\mathrm{.}67$ $$23\mathrm{.}87$

Fixed operating costs $$37,000$ $$37,500$ $$38,120$ $$39,560$

This project will require an investment of $$15,000$ in new equipment. Under the new tax law, the equipment is eligible for $100\%$ bonus deprecation at t $=0,$ so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project$$s four$-$year life. Fox pays a constant tax 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.

Which of the following most closely approximates what the project$$s 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.$)$

$$49,712\mathrm{.}59$

$$55,236\mathrm{.}21$

$$44,188\mathrm{.}97$

$$63,521\mathrm{.}64$

Which of the of the following most closely approximates what the project$$s 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.$)$

$$67,993\mathrm{.}44$

$$62,553\mathrm{.}96$

$$51,675\mathrm{.}01$

$$54,394\mathrm{.}75$

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

No other firm would take on this project if Fox turns it down. Which of the following most closely approximates how much Fox should reduce the NPV of this project, assuming it is discovered that this project would reduce one of its division$$s net after$-$tax cash flows by $$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.$)$

$$1,054\mathrm{.}83$

$$930\mathrm{.}74$

$$1,240\mathrm{.}98$

$$744\mathrm{.}59$

The project will require an initial investment of $$15,000,$ but the project will also be using a company$-$owned truck that is not currently being used. This truck could be sold for $$12,000,$ after taxes, if the project is rejected. What should Fox do to take this information into account?

The company does not need to do anything with the value of the truck because the truck is a sunk cost.

Increase the amount of the initial investment by $$12,000.$

Increase the NPV of the project by $$12,000.$