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 Lumbering Ox Truckmakers:

Lumbering Ox Truckmakers 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 (units)	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 except depreciation	$32,500	$33,450	$34,950	$34,875
Accelerated depreciation rate	33%	45%	15%	7%

This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the projects four-year life. Lumbering Ox Truckmakers pays a constant tax rate of 40%, and it has a WACC of 11%.

When using accelerated depreciation, the projects net present value (NPV) is NPV Options: $45,518. $31,665 $35, 623 $39,581 $45,518

(Hint: Round each element in your computationincluding the projects net present valueto the nearest whole dollar.)

When using straight-line depreciation, the projects NPV is ____? NPV Options: $39,239 $45,125 $49,049 $37,277

(Hint: Again, round each element in your computationincluding the projects net present valueto the nearest whole dollar.)

Using the straight-line /Accelerated Depreciation? depreciation method will result in the greater NPV for the project.

No other firm would take on this project if Lumbering Ox Truckmakers turns it down. How much should Lumbering Ox Truckmakers reduce the NPV of this project if it discovered that this project would reduce one of its divisions net after-tax cash flows by $700 for each year of the four-year project?

A.$2,172

B.$1,303

C.$1,629

D.$1,846

Lumbering Ox Truckmakers spent $2,250.00 on a marketing study to estimate the number of units that it can sell each year. What should Lumbering Ox Truckmakers do to take this information into account?

A.The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost.

B.Increase the amount of the initial investment by $2,250.00.

C.Increase the NPV of the project $2,250.00.