Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Fox Co.: Fox 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 5,500 5,200 5,700 5,820 Sales price $42.57 $43.55 $44.76 $46.79 Variable cost per unit $22.83 $22.97 $23.45 $23.87 Fixed operating costs except depreciation $66,750 $68,950 $69,690 $68,900 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Fox 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. (Note: Round your answer to the nearest whole dollar.) $66,098 $95,015 O $82,622 $74,360 Now determine what the project's NPV would be when using straight-line depreciation. (Note: Round your answer to the nearest whole dollar.) The depreciation method will result in the highest NPV for the project. No other firm would take on this project if Fox turns it down. How much should Fox 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 $300 for each year of the four-year project? (Note: Round your answer to the nearest whole dollar.) $698 O $559 O $931 O $791 Fox spent $2,500 on a marketing study to estimate the number of units that it can sell each year. What should Fox 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. O Increase the NPV of the project $2,500. O Increase the amount of the initial investment by $2,500. Now determine what the project's NPV would be when using straight-line depreciation. (Note: Round your answer to the nearest whole dollar.) $82,451 The depreciation method will result in the highest NPV for the project. $78,328 No othe $94,819 take on this project if Fox turns it down. How much should Fox reduce the NPV of this project if it discovered that this its division's net after-tax cash flows by $300 for each year of the four-year project? (Note: Round your answer to the would r whole d $103,064 The depreciation method will result in the highest NPV for the project. accelerated No o take on this project if Fox turns it down. How much should Fox reduce its division's net after-tax cash flows by $300 for each year of the four- woul straight-line whole uona)
