Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Garida Co.: Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 2 Year 1 5,500 $42.57 Year 3 5,700 $44.76 Year 4 5,820 5,200 $43.55 $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. Garida pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's not present value (NPV) would be under the new tax taw. Determine what the project's net present value (NPV) would be under the new tax law. $100,436 O $120,523 $80,349 O $115,501 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 $124,494 $129,474 No other firm would take on this project if Garida turns it down. How much should Garid NPV of this proj project would reduce one of its division's net after-tax cash flows by $500 for each year $94,615 year project? $99,595 $1,706 O $1,551 $1,318 $931 Garida spent $2,750 on a marketing study to estimate the number of units that it can sell each year. What should Gar into account? Increase the NPV of the project $2,750. O Increase the amount of the initial Investment by $2,750. The company does not need to do anything with the cost of the marketing study because the marketing stud Using the depreciation method will result in the highest NPV for the project. bonus No other fi on this project if Garida turns it down. How much should Garida reduce the NPV of project wo straight-line of its division's net after-tax cash flows by $500 for each year of the four-year pro $1,706 $1,551 O $1,318 $931 No other firm would take on this project if Garida turns it down. How much should Garida 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? $1,706 $1,551 $1,318 $931 Garida spent $2,750 on a marketing study to estimate the number of units that it can sell each year. What should Garida do to take this information into account? Increase the NPV of the project $2,750. Increase the amount of the initial investment by $2,750. The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost
