Question
Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year
Yeatman 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 5,500 5,200 5,700 5,820 Sale price $42.57 $43.55 $44.76 $46.79 Variable cost per unit $22.83 $22.97 $23.45 $23.87 Fixed Operating costs except depreciation $66,750 $68,950 $69,690 $68,900 Accelerated Depreciation Rate 33% 45% 15% 7% The project will require an investment of $25,000 in new equipment but no investment is needed in its net operating working capital. The equipment will have a salvage value of $2,000 at the end of the project's 4-year life. Yeatman pays a constant tax rate of 40%, and the MACRS Depreciation is used. What is the FCF in year 4? What is the project's NPV if the WACC is 11%? What would be the project's NPV if straight-line depreciation is used? Assume the book value at the end of year 4 is 0 but the salvage value (market value) will still be $2,000.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 CFs by $400 for each year of the four-year project?
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