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
Unit sales	4,200	4,100	4,300	4,400
Sales price	$29.82	$30.00	$30.31	$33.19
Variable cost per unit	$12.15	$13.45	$14.02	$14.55
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. McFann 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.

Determine what the project's net present value (NPV)

would be when using accelerated depreciation.

Q $42,318 o $60,833 Q $52,898 Q $47,608

Now determine what the project's NPV would be when using straight-line depreciation: 50,091 or 52,727 or 65,909 or 60,636.

Using the _____ accelerated or straight line (which one) depreciation method will result in the highest NPV for the 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 $400 for each year of the four-year project?

Q $1,055 Q $1,241 Q $931 Q $1,365