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2. Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Yeatman Co.: Yestman Co, is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 3,000 $17.25 Year 2 3.250 Year 3 3,300 Year 4 3.400 Si 24 Unitale Sales price Variable cost per unit Fixed operating costs ad $17.30 $5.92 $17.000 $17.45 19.03 SBB $12,500 59.06 $13,250 $13,220 This project will require an investment of $25,000 in new equipment Under the new tax law, the equipment in eligible for 100% bonus diapocational 1-0. O it will be fully deprecated at the time of purchase. The equipment will have no salvage value at the end of the projects for life Yatman pays a constant tax rate of 25%, and it has a weighted averor cost of capital (WACCIO 11 Determine what the projects at present value (NPV) would be under the new taxtaw. Determine what the projects not present Value (NP) would be under the tax law Determine what the project's net present value (NPV) would be under the new tax law, $12,286 $15,358 $17,662 $18,430 Now determine what the project's NPV would be when using straight-line depreciation. Using the depreciation method will result in the highest NPV for the project No other firm would take on this project if Yeatman turns it down. How much should Yetman 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 $700 for each year of the four-year project $1,303 $2,369 $1,846 52172 Using the depreciation method will result in the highest NPV for the project. No other fier would take on this project if Yeatman turns it down. How much should Yeatman 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 S700 for each year of the four year project? $1,303 $2,389 $1,846 $2.172 The project will require an initial investment of $25,000, but the project will also be using a company-owned truck that is not currently being used: This truck could be sold for $18,000, after taxes, if the project is rejected. What should Yeatman do to take this information into account? increase the NPV of the project by $18,000. The company does not need to do anything with the value of the truck because the truck is a sunk cost Increase the amount of the initial investment by $18,000