Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Fox Co.:

This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the projects 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 projects net present value (NPV) would be when using accelerated depreciation.

Determine what the projects net present value (NPV) would be when using accelerated depreciation. (Note: Round your intermediate calculations to the nearest whole number.)

$36,937

$46,171

$55,405

$41,554

Now determine what the projects NPV would be when using straight-line depreciation.

$45,830

59,579

43,539

52,704

Using the (accelerated or straight line) 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 divisions net after-tax cash flows by $700 for each year of the four-year project?

$2,172

$1,629

$2,389

$1,303

Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Unit sales Sales price Variable cost per unit Fixed operating costs except depreciation Accelerated depreciation rate Year 1 4,200 $29.82 $12.15 $41,000 33% Year 2 4,100 $30.00 $13.45 $41,670 45% Year 3 4,300 $30.31 $14.02 $41,890 15% Year 4 4,400 $33.19 $14.55 $40,100 7%