Cash Flow Estimation and Risk Analysis

Companies invest in expansion projects with the expectation of increasing the earnings of its business Consider the case of McFann Co.: McFann Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 4,250 $38.50 $39.88 $40.15 $41.55 $22.34 $22.85 $23.67 $23.87 Fixed operating costs except depreciation $37,000 $37,500 $38,120 $39,560 7% Unit sales Sales price Variable cost per unit 3,500 4,000 4,200 Accelerated depreciation rate 33% 4590 15% 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. McFann 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 $34,479 O $51,719 O $43,099 O $49,564 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. Using the depreciation method will result in the highest NPV for the project. No other firm would take on this project if McFann turns it down. How much should McFann 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 $400 for each year of the four-year project? o $1,365 $745 O $1,241 O $931 McFann spent $2,750 on a marketing study to estimate the number of units that it can sell each year. What should McFann do to take this information into account? O Increase the NPV of the project $2,750 O Increase the amount of the initial investment by $2,750 O The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost