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 2 Year 3 Year 1 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 $12.00 $10.85 $11.95 Fixed operating costs $32,500 $33,450 $34,950 $34,875 This project will require an investment of $20,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at 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 t 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. $58,989 $51,295 O $46,166 $41,036 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. Using the No other firm would take on this project if Fox turns it down. How much should Fox 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 $500 for each year of the four-year project? $931 $1,551 O $1,163 O$1,318 The project will require an initial investment of $20,000, but the project will also be using a company-owned truck that is not currently being used This truck could be sold for $9,000, 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 $9,000 Increase the NPV of the project by $9,000 Grade It Now Save & Continue Continue without saving Now determine what the project's NPV would be when using straight-line depreciation $47,664 depreciation method will result in the highest NPV for the Using the $62,716 No other firm would take on this project if Fox turns it down. How much should Fox redu of this project if it discovered that this project $57,699 would reduce one of its division's net after-tax cash flows by $500 for each year of the f oject? $50,173 $931 $1,551 O $1,163 O$1,318 The project will require an initial investment of $20,000, but the project will also be using a company-owned truck that is not currently being used This truck could be sold for $9,000, 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 $9,000 Increase the NPV of the project by $9,000 Grade It Now Save & Continue Continue without saving 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. bonus on this project if Fox turns it down. How much should Fox reduce the NPV of this project if it discovered that this project No other fi would redu straiaht-line vision's net after-tax cash flows by $500 for each year of the four-year project? $931 $1,551 O $1,163 O$1,318 The project will require an initial investment of $20,000, but the project will also be using a company-owned truck that is not currently being used This truck could be sold for $9,000, 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 $9,000 Increase the NPV of the project by $9,000 Grade It Now Save & Continue Continue without saving