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 Garida Co.: Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Unit sales 4,200 4,100 4,300 Sales price $29.82 $30.00 $30.31 Variable cost per unit $12.15 $13.45 $14.02 Fixed operating costs $41,000 $41,670 $41,890 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 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. Garie 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. Year 4 4,400 $33.19 $14.55 $40,100 Determine what the project's net present value (NPV) would be under the new tax law. $56,954 $50,626 21 stv Ch 12- Assignment - Cash Flow Estimation and Risk Analysis would be under the new tax law. Determine what the project's net present value (NPV) would be under the new tax law. $56,954 $50,626 $72,774 $63,282 Now determine what the project's NPV would be when using straight-line depreciation... depreciation method will result in the highest NPV for the project. No other firm would take on this project if Garida turns it down. How much should Garida 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 $700 for each year of the four-year project? Using the $1,629 $1,303 $1,846 $2,172 Garida spent $2,250 on a marketing study to estimate the number of units that it can sell each year. What should Garida do to take this information into account? Increase the amount of the initial investment by $2,250. 21 Stv N 7 A Now determine what the project's NPV would be when using straight-line depreciation. depreciation method will result in the highest NPV for the project. No other firm would take on this project if Garida turns it down. How much should Garida 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 $700 for each year of the four-year project? Using the $1,629 $1,303 $1,846 $2,172 Garida spent $2,250 on a marketing study to estimate the number of units that it can sell each year. What should Garida do to take this information into account? Increase the amount of the initial investment by $2,250. Increase the NPV of the project $2,250. The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost. 21 tv S Grade It Now Save & Continue Continue without saving A Now determine what the project's NPV would be when using straight-line depreciation. Using thei No other firm would take on this project if Garida turns it down. How much should Garid project would reduce one of its division's net after-tax cash flows by $700 for each year $1,629 $1,303 $1,846 depreciation method will result in the highest NPV for the $2,172 $62,439 JUN 21 $71,805 tv $78,049 $59,317 Garida spent $2,250 on a marketing study to estimate the number of units that it can sell each year. What should Garida into account? he NPV of this proje -year project? Increase the amount of the initial investment by $2,250. Increase the NPV of the project $2,250. The company does not need to do anything with the cost of the marketing study because the marketing study is a Grade It Now 197 C Now determine what the project's NPV would be when using straight-line depreciation. Using the No other fi project wo straight-line bonus $1,629 $1,303 $1,846 $2,172 depreciation method will result in the highest NPV for the project. on this project if Garida turns it down. How much should Garida reduce the NPV of this proje of its division's net after-tax cash flows by $700 for each year of the four-year project? Garida spent $2,250 on a marketing study to estimate the number of units that it can sell each year. What should Garida into account? Increase the amount of the initial investment by $2,250. Increase the NPV of the project $2,250. The company does not need to do anything with the cost of the marketing study because the marketing study is a 21 tv Grade It Now C 0975
