LIITUSI 6. Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Celestial Crane Cosmetics: Celestial Crane Cosmetics is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 3 Year 4 Year 1 4,800 Year 2 5,100 $23.45 5,000 5,120 $22.33 $23.85 $24.45 Unit sales (units) Sales price Variable cost per unit Fixed operating costs except depreciation $9.45 $10.85 $11.95 $12.00 $32,500 $33,450 $34,950 $34,875 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Celestial Crane Cosmetics pays a constant tax rate of 40%, and it has a required rate of return of 11%. (Hint: Round each element in your computation- When using accelerated depreciation, the project's net present value (NPV) is including the project's net present value-to the nearest whole dollar.) (Hint: Again, round each element in your computation--including the When using straight-line depreciation, the project's NPV is 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 Celestial Crane Cosmetics turns it down. How much should Celestial Crane Cosmetics reduce the NPV of this Accelerated depreciation rate 33% 45% 15% 79 This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Celestial Crane Cosmetics 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 including the project's net present value-to the nearest whole dollar.) (Hint: Round each element in your computation- When using straight-line depreciation, the project's NPV is project's net present value-to the nearest whole dollar.) (Hint: Again, round each element in your computation-Including the Using the depreciation method will result in the greater NPV for the project. No other firm would take on this project if Celestial Crane Cosmetics turns it down. How much should Celestial Crane Cosmetics 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? O $931 O $1,365 O $1,241 O $745 Celestial Crane Cosmetics spent $1,750.00 on a marketing study to estimate the number of units that it can sell each year. What should Celestial Crane Cosmetics do to take this information into account? O Increase the amount of the initial investment by $1,750.00. The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost. Chapter 10 Assignment This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Celestial Crane Cosmetics 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 including the project's net present value-to the nearest whole dollar.) (Hint: Round each element in your computation- $31,665 When using straight-line depreciation, the project's NPV is project's net present value-to the nearest whole dollar.) (H$35,623 round each element in your computation-including the $39,581 Using the depreciation method will result in the greater N $47,497 project. No other firm would take on this project if Celestial Crane Cosmetics turns it down. How much should Celestial Crane Cosmetics 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? O $931 O $1,365 O $1,241 O $745 Celestial Crane Cosmetics spent $1,750.00 on a marketing study to estimate the number of units that it can sell each year. What should Celestial Crane Cosmetics do to take this information into account? O Increase the amount of the initial investment by $1,750.00. The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost. Increase the NPV of the project $1,750.00. Grade It Now Save & Continue Chapter 10 Assignment This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Celestial Crane Cosmetics 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 including the project's net present value--to the nearest whole dollar.) (Hint: Round each element in your computation- When using straight-line depreciation, the project's NPV is project's net present value-to the nearest whole dollar.) (Hint: Again, round each element in your computation-including the $37,277 Using the depreciation method will re $39,239 reater NPV for the project. $51,011 No other firm would take on this project if Celestial Crane urns it down. How much should Celestial Crane Cosmetics reduce the NPV of this project if it discovered that this project would reduce one $45,125 's net after-tax cash flows by $400 for each year of the four-year project? O $931 O $1,365 O $1,241 O $745 Celestial Crane Cosmetics spent $1,750.00 on a marketing study to estimate the number of units that it can sell each year. What should Celestial Crane Cosmetics do to take this information into account? Increase the amount of the initial investment by $1,750.00. The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost. Increase the NPV of the project $1,750.00. Grade it Now Save & Continue LILUI $20,000 ih new equipment. The equipment will have no salvage value at the end of the project's four-year life. Celestial Crane Cosmetics 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 including the project's net present value-to the nearest whole dollar.) . (Hint: Round each element in your computation- When using straight-line depreciation, the project's NPV is project's net present value-to the nearest whole dollar.) (Hint: Again, round each element in your computation-Including the Using the depreciation method will result in the greater NPV for the project. accelerated No other on this project if Celestial Crane Cosmetics turns it down. How much should Celestial Crane Cosmetics reduce the NPV of this project if straight-linet this project would reduce one of its division's net after-tax cash flows by $400 for each year of the four-year project? O $931 O $1,365 $1,241 0 $745 Celestial Crane Cosmetics spent $1,750.00 a marketing study to estimate the number of units that it can sell each year. What should Celestial Crane Cosmetics do to take this information into account? O Increase the amount of the initial investment by $1,750.00. The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost. Increase the NPV of the project $1,750.00. Grade It Now Save & Continue