$5.$ Analysis of an expansion project

Pheasant Pharmaceuticals is considering an investment that will have the following sales, variable costs, and fixed operating costs:

Year $1$ Year $2$ Year $3$ Year $4$

Sales $($units$)5,5005,2005,7005,820$

Sales price $$42\mathrm{.}57$ $$43\mathrm{.}55$ $$44\mathrm{.}76$ $$46\mathrm{.}79$

Variable cost per unit $$22\mathrm{.}83$ $$22\mathrm{.}97$ $$23\mathrm{.}45$ $$23\mathrm{.}87$

Fixed costs, excluding depreciation $$66,750$ $$68,950$ $$69,690$ $$68,900$

Accelerated depreciation rate $33\%45\%15\%7\%$

This project will require an investment of $$15,000$ in new equipment. The equipment will have no salvage value at the end of the project's four$-$year life. Pheasant Pharmaceuticals pays a constant tax rate of $40\%,$ and it has a required rate of return of $11\%.$

When using accelerated depreciation, the project's net present value $($NPV$)$ is $.$

When using straight$-$line depreciation, the project's NPV is $.$

Using the $$ depreciation method will result in the greater NPV for the project.

No other firm would take on this project if Pheasant Pharmaceuticals turns it down. How much should Pheasant Pharmaceuticals 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 S$300$ for each year of the four$-$year project?

O $$559$ O $$791$ O $$1,024$ O $$931$

Pheasant Pharmaceuticals spent SI$,500\mathrm{.}00$ on a marketing study to estimate the number of units that it can sell each year. What should Pheasant Pharmaceuticals do to take this information into account?

O Increase the NPV of the project $$1,500\mathrm{.}00.$

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

O Increase the amount of the initial investment by $$1,500\mathrm{.}00.$