Question
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
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:
Year 1 | Year 2 | Year 3 | Year 4 | |
---|---|---|---|---|
Unit sales | 3,500 | 4,000 | 4,200 | 4,250 |
Sales price | $38.50 | $39.88 | $40.15 | $41.55 |
Variable cost per unit | $22.34 | $22.85 | $23.67 | $23.87 |
Fixed operating costs | $37,000 | $37,500 | $38,120 | $39,560 |
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 projects four-year life. Yeatman pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the projects net present value (NPV) would be under the new tax law.
Determine what the projects net present value (NPV) would be under the new tax law.
$55,236
$66,283
$49,712
$44,189
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