6. Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Black Sheep Broadcasting: Black Sheep Broadcasting is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 2 4,000 Year 3 4,200 Year 4 4,250 Unit sales (units) Sales price $39.88 $40.15 $41.55 Year 1 3,500 $38.50 $22.34 $37,000 33% Variable cost per unit Fixed operating costs except depreciation Accelerated depreciation rate $22.85 $37,500 45% $23.67 $38,120 15% $23.87 $39,560 7% This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Black Sheep Broadcasting pays a constant tax rate of 40%, and it has a required rate of return of 11%. . (Hint: Round each element in your computation- When using accelerated depreciation, the project's net present value (NPV) is including the project's net present value-to the nearest whole dollar.) $37,170 7. (Hi $41,817 round each element in your computation including the When using straight-line depreciation, the project's NPV is project's net present value-to the nearest whole dollar.) $46,463 Using the depreciation method will result in the greater N$ broject. No other firm would take on this project if Black Sheep Broadcasting turns it down. How much should Black Sheep Broadcasting 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 $300 for each year of the four-year project? This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Black Sheep Broadcasting pays a constant tax rate of 40%, and it has a required rate of return of 11%. . (Hint: Round each element in your computation- When using accelerated depreciation, the project's net present value (NPV) is including the project's net present value-to the nearest whole dollar.) 7. (Hint: Again, round each element in your computation-including the When using straight-line depreciation, the project's NPV is project's net present value-to the nearest whole dollar.) Using the depreciation method will result in the greater NPV for the project. No other fi accelerated on this project if Black Sheep Broadcasting turns it down. How much should Black Sheep Broadcasting reduce the NPV of this straight-line it this project would reduce one of its division's net after-tax cash flows by $300 for each year of the four-year project? project if it No other firm would take on this project if Black Sheep Broadcasting turns it down. How much should Black Sheep Broadcasting 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 $300 for each year of the four-year project? 0 $698 0 $1,024 O $559 0 $931 Black Sheep Broadcasting spent $2,750.00 on a marketing study to estimate the number of units that it can sell each year. What should Black Sheep Broadcasting do to take this information into account? O Increase the NPV of the project $2,750.00. O Increase the amount of the initial investment by $2,750.00. O The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost
