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 Yeatman Co.:

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	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 $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 projects four-year life. Yeatman pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the projects net present value (NPV) would be under the new tax law.

Which of the following most closely approximates what the projects 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.)

$55,043.82

$49,539.44

$66,052.58

$63,300.39

Which of the of the following most closely approximates what the projects 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.)

$54,202.36

$51,492.24

$62,332.71

$67,752.95

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

No other firm would take on this project if Yeatman turns it down. Which of the following most closely approximates how much Yeatman should reduce the NPV of this project, assuming it is discovered that this project would reduce one of its divisions net after-tax cash flows by $300 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.)

$698.05

$1,023.80

$930.73

$791.12

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 $14,000, after taxes, if the project is rejected. What should Yeatman do to take this information into account?

Increase the amount of the initial investment by $14,000.

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

Increase the NPV of the project by $14,000.

Thank you for help!