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:'o MINDTAP Maman Alhusennan v Q) a In hunt-W Chapter 12- Part II -- 6 Activity Information '3' 3. Analysisufan expansion project M Aa a Companies invest in expansion projecs with the expeciation 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 oosts, and fixed operating oosts: Year 1 Year 2 Year 3 Year 4 Unit sales 5,500 5,200 5,700 5,820 Sales prioe $42.57 $43.55 $44.76 $46.79 Variable oust per unit $22.33 $22.97 $23.45 $23.37 Fixed operating costs except depreciation $66,750 $63,950 $69,690 $63,900 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $25,000 in new Determine what the project's net present value (NW) equipment. The equipment will have no salvage value at would be when using accelerated depreciation. the end of the project's four-year life. McFann pays a 0 $65 279 oonstant tax rate of 40%, and it has a weighted average 0 $53,026 oust of capital (WACC) of 11%. Determine what the 0 $87,033 project's net present value (NPV) would be when using 0 $72'532 accelerated depreciation. Now determine what the project's NW would be when using straight-line depreciab'on. |:| Using the accelerated depreciab'on method will result in the highest NW for the project. No other firm would take on this project if McFann turns it down. HowI much should McFann reduce the NW of this project if it disoovered 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? 0 $1,055 0 $?45 0 $1,241 0 $931 McFann spent $2,500 on a marketing study to estimate the number of units that it can sell each year. What should McFann do to take this information into account? 0 The oompany does not need to do anything with the oost of the marketing study because the marketing study is a sunk oust. 0 Increase the amount of the initial investment by $2,500. 0 Increase the NW of the project $2.500. . Is anayslslnoapl u g Ing M a := Projects differ in risk, and risk analysis is a critical component of the capital budgeting process. Consider the case of United Recycling Inc.: United Recycling Inc. is one of the largest recyclers of glass and paper products in the United States. The company is looking into expanding into the cardboard recycling business. The company's CFC! has performed a detailed analysis of the proposed expansion. The company's CFO hired a third-party consulting firm to estimate the cost per ton of processing the cardboard. The consulting firm's cost estimate for processing the cardboard was significantly higher than what the CFO had been using in his financial model. Based on the information given. determine which of the statements is correct. El when the CFO adjusts the cost per ton of processing the cardboard; the project's NW will decrease. II] when the CFO adjusts the cost per ton of processing the cardboard; the project's NW will increase. Eyaluating risk is an important part of the capital budgeting process. which of the following is measured by the variability of the project's expected returns? 0 Corporate, or withinrm, risk El Market. or beta. risk 0 Stand-alone risk I." d MINDTAP III- Hunt-W Chapter 12 - Part II " U :tiE '.." S\"\"\"'.'.... 2:1 " 3:" 3".\" TL" """""'"_|:I:I:|"""'""""_"" 2. Incremental costs - Initial and terminal cash ow A; Aa '= Consider the case of Alexander Industries: Alexander Industries is oonsidering a project that requires an investment in new equipment of $3,800,000, with an additional $190,000 in shipping and installation oosts. Alexander estimates that its accounts receivable and inventories need to increase by $?60,000 to support the new project, some of which is finanoed by a $304,000 increase in spontaneous liabilities {aooounts payable and accruals}. The total cost of Alexander's new equipment is and oonsists of the prioe of the new equipment plus the In contrast, Alexander's inial net investment outlav is Suppose Alexander's new equipment is expected to sell for $800,000 at the end of its four-veer useful life, and at the same time, the firm expects to recover all of its net working capital investment. The company:r chose to use straight-line depreciation, and the new equipment was full}:r depreciated by the end of its useful life. If the firm's tax rate is 40%, what is the project's total termination cash flow? 0 $??0,000 0 $400,000 0 $935,000 0 $000,000