Ch 12: Assignment - Cash Flow Estimation and Risk Analysis Back to Assignment Attempts Average/5 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 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 5,500 5,200 5,700 5,820 $42.57 $43.55 $44.76 $46.79 Unit sales Sales price Variable cost per unit Fixed operating costs $22.83 $22.97 $23.45 $23.87 $66,750 $68,950 $69,690 $68,900 This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 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. McFonn 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 not present value (NPV) would be under the new tax law. $120,523 O $100,436 $80,349 $90,392 Now determine what the project's NPV would be when using straight-line depreciation Using the straight-line depreciation method will result in the highest NPU for thd $114,534 $99,595 No other firm would take on this project McFann turns it down. How much should McF $129,474 project would reduce one of its division's net after-tax cash flows by $600 for each year $94,615 he NPV of this project if it discovered that this Year 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 $600 for each year of the four-year project? O $1,396 $1,117 $1,861 $2,047 McFann spent $2,250 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? 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. Ch 12: Assignment - Cash Flow Estimation and Risk Analysis Back to Assignment Attempts Average/5 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 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 5,500 5,200 5,700 5,820 $42.57 $43.55 $44.76 $46.79 Unit sales Sales price Variable cost per unit Fixed operating costs $22.83 $22.97 $23.45 $23.87 $66,750 $68,950 $69,690 $68,900 This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 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. McFonn 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 not present value (NPV) would be under the new tax law. $120,523 O $100,436 $80,349 $90,392 Now determine what the project's NPV would be when using straight-line depreciation Using the straight-line depreciation method will result in the highest NPU for thd $114,534 $99,595 No other firm would take on this project McFann turns it down. How much should McF $129,474 project would reduce one of its division's net after-tax cash flows by $600 for each year $94,615 he NPV of this project if it discovered that this Year 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 $600 for each year of the four-year project? O $1,396 $1,117 $1,861 $2,047 McFann spent $2,250 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? 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
