Companies invest in expansion projects with the expectation of increasing the earnings of its business.

Consider the case of Pheasant Pharmaceuticals:

Pheasant Pharmaceuticals 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 $($units$)4,2004,1004,3004,400$

Sales price $$29\mathrm{.}82$ $$30\mathrm{.}00$ $$30\mathrm{.}31$ $$33\mathrm{.}19$

Variable cost per unit $$12\mathrm{.}15$ $$13\mathrm{.}45$ $$14\mathrm{.}02$ $$14\mathrm{.}55$

Fixed operating costs except depreciation $$41,000$ $$41,670$ $$41,890$ $$40,100$

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. Pheasant Pharmaceuticals pays a constant tax rate of $40\%,$ and it has a required rate of return of $11\%.$

When using accelerated depreciation, the project$$s net present value $($NPV$)$ is $\_\_\_\_\_\_.($Hint: Round each element in your computation$$including the project$$s net present value$$to the nearest whole dollar.$)$

When using straight$-$line depreciation, the project$$s NPV is $\_\_\_\_\_\_\_\_.($Hint: Again, round each element in your computation$$including the project$$s net present value$$to the nearest whole dollar.$)$

Using the $\_\_\_\_\_\_\_$ depreciation method will result in the greater NPV for the project.

No other firm would take on this project if Pheasant Pharmaceuticals turns it down. How much should Pheasant Pharmaceuticals 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?

A$.$ $$931$

B$.$ $$1,706$

C$.$ $$1,318$

D$.$ $$1,551$

Pheasant Pharmaceuticals spent $$2,500\mathrm{.}00$ on a marketing study to estimate the number of units that it can sell each year. What should Pheasant Pharmaceuticals do to take this information into account?

A$.$ The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost.

B$.$ Increase the NPV of the project $$2,500\mathrm{.}00.$

C$.$ Increase the amount of the initial investment by $$2,500\mathrm{.}00.$