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: Unit sales Sales price Variable cost per unit Fixed operating costs Year 1 5,500 $42.57 $22.83 $66,750 Year 2 5,200 $43.55 $22.97 $68,950 Year 3 5,700 $44.76 $23.45 $69,690 Year 4 5,820 $46.79 $23.87 $68,900 This project will require an investment of $10,000 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. Yeatman 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. Determine what the project's net present value (NPV) would be under the new tax law. $125,023 O $104,186 $93,767 O $119,814 Now determine what the project's NPV would be when using straight-line depreciation. Using the $103,625 depreciation method will result in the highest NPV for the $119,169 No other firm would take on this project if Yeatman turns it down. How much should Yea the NPV of this project if it discovered that this $134,713 project would reduce one of its division's net after-tax cash flows by $600 for each year rear project? $129,531 $1,582 $1,861 $2,047 $1,396 Yeatman spent $2,250 on a marketing study to estimate the number of units that it can sell each year. What should Yeatman do to take this information into account? O The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost. Increase the NPV of the project $2,250. O Increase the amount of the initial investment by $2,250. Now determine what the project's NPV would be when using straight-line depreciation. Using the depreciation method will result in the highest NPV for the project. straight-line No other fi project wo on this project if Yeatman turns it down. How much should Yeatman reduce the NPV of this project if it discovered that this of its division's net after-tax cash flows by $600 for each year of the four-year project? bonus O $1,582 O $1,861 $2,047 $1,396 Yeatman spent $2,250 on a marketing study to estimate the number of units that it can sell each year. What should Yeatman do to take this information into account? The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost. Increase the NPV of the project $2,250. Increase the amount of the initial investment by $2,250
