Assignment 12 - Cash Flow Estimation and Risk Analysis Attempts: Average: 5 Attention: Due to a bug in Google Chrome, this page may not function correctly. Click here to learn more. 3. Analysis of an expansion project Aa Aa 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 except depreciation Accelerated depreciation rate 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 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. Yeatman pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be when using accelerated depreciation. Determine what the project's net present value (NPV) would be when using accelerated depreciation. $91,148 O $79,259 O $63,407 $95,111 Now determine what the project's NPV would be when using straight-line depreciation. $75,053 $98,754 Using the depreciation method will result in the highest NPV for the pl $90,853 $79,003 No other firm would take on this project if Yeatman turns it down. How much should Yeatman reduce the NPV of this project if it ('scovered 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? O $1,318 O $1,706 O $1,551 $931 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 amount of the initial Investment by $2,250. Increase the NPV of the project $2,250. Assignment 12 - Cash Flow Estimation and Risk Analysis 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 accelerated No other firm would take on this project If Yeatman turns it down. How much should Yeatman 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? $1,318 O $1,706 $1,551 $931 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 amount of the initial investment by $2,250. Increase the NPV of the project $2,250
