Question

3. Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Fox Co.: 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 Year 1 4,200 $29.82 $12.15 $41,000 Year 2 4,100 $30.00 $13.45 $41,670 Year 3 4,300 $30.31 $14.02 $41,890 Year 4 4,400 $33.19 $14.55 $40,100 This project will require an investment of $10,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project's four-year life. Fox pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be under the new tax law. Determine what the project's net present value (NPV) would be under the new tax law. $67,032 $77,087 $80,438 $60,329 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.

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins Z AutoSum Cut AC Wrap Text General Calibri 11 Copy Fill Merge & Center Conditional Format Formatting as Table Styles Insert Delete Format Paste в IU* 000 Cell Sort & Find & % Format Painter Clear Filter Select Styles Clipboard Font Alignment Number Cells Editing fox ВBВ492 AU AV AW AX AY AZ ВА ВВ ВС BD ВЕ 492 IN 100% BONUS = INITIAL INVESTMENT = 10000*(1-0.25) = 7500 493 494 4100 4400 UNITS 4200 4300 495 100% BONUS DEPRECIATION 33.19 SP 29.82 30 30.31 496 13.45 14.02 14.55 VC 12.15 497 YEAR 0 2 3 4 498 COST OF MACHINE (AFTER TAX) -7500 499 125244 146036 SALES 123000 130333 55145 60286 500 VARIABLE COST 51030 64020 501 FIXED COST 41000 41670 41890 40100 502 DEPRECIATION TAX SHIELD 28157 33214 41916 503 РВT 26185 TAX @25% 504 8303.5 6546.25 7039.25 10479 24910.50 19638.75 505 PAT 21117.75 31437.00 506 DEPRECIATION 0 0 0 0 31437 507 CFAT 24911 19639 21118 508 21118 19639 509 TERMINAL CFAT -7500 24911 31437 PV FACTOR@11% 0.8116 510 0.9009 0.7312 0.6587 15441.30 511 PV OF CFAT -7500.00 22442.34 15939.45 20708.53 67032 NPV ANSWER: NPV = 67032 512 EAC MACRS HPR GMAM NPV RELEVANT STEIN iD IRRnpvbeta RATION PBP ARR invest, EAA BETA LEVERED MI-np-ir REPLACEMENT S REPLACEMENT BOND OPTION TO WAIT EEE erences: DX15 Rea 120% + XУ W 01:52 ENG 22-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins E AutoSum - Cut AC Wrap Text Calibri 11 General Copy Fill Conditional Format Formatting as Table Styles Merge & Center Insert Delete Format Paste 090 Cell Sort & Find & BIU % Format Painter Clear Filter Select Styles Clipboard Font Alignment Number Cells Editing fox AW514 AU AV AW AX AY AZ ВВ ВС BD ВЕ 514 515 UNITS 4200 4100 4300 4400 516 29.82 30.31 STRAIGHT LINE SP 30 33.19 517 VC 12.15 13.45 14.02 14.55 518 YEAR 1 3 519 -10000 COST OF MACHINE SALES 123000 520 125244 130333 146036 55145 64020 521 VARIABLE COST 51030 60286 41000 41670 522 FIXED COST 41890 40100 523 DEPRECIATION 2500 2500 2500 2500 25657 524 PBT 30714 23685 39416 525 TAX @25% 7678.5 5921.25 6414.25 9854 19242.75 526 PAT 23035.5 17763.75 29562 527 DEPRECIATION 2500 2500 2500 2500 20263.75 25535.5 32062 528 CFAT 21742.75 529 25535.5 20263.75 21742.75 530 TERMINAL CFAT -10000 32062 PV FACTOR @11% 531 1 0.9009 0.8116 0.7312 0.6587 PV OF CFAT 532 -10000.00 23004.95 16446.51 15898.11 21120.23 66471 NPV ANSWER: 66471 533 534 STEIN i I HPR GMAM NPV RELEVANT BETA LEVERED IRRnpvbeta invest, EAA REPLACEMENT S RATION PBP ARR MI-np-ir EAC MACRS REPLACEMENT BOND OPTION TO WAIT erences: ED12 Rea 120% W 01:54 ENG 22-11-2019 BA

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut AC EWrap Text Calibri 11 General Copy Fill Merge & Center Paste в IU* +.0 .00 Conditional Format Cell Insert Delete Format Sort & Find & % Format Painter .00 0 Clear Filter Select Formatting as Table Styles Editing Clipboard Font Alignment Number Styles Cells fox AW604 ВС AU AV AW AX AY AZ ВВ BD ВЕ 590 591 592 593 Q.3 USING 100% BONUS DEPRECIATION METHOD WILL RESULT IN HIGHEST NPV 594 ANSWER 595 REDUCTION IN NPV =| 596 500 X PVIFA @11% 4 YEARS Q.4 597 500 X 3.1024 1551 598 ANSWER 599 600 Q.5 601 ANSWER THE COMPANY DOES NOT NEED TO DO ANYTHING WITH IT, MARKETING STUDY IS A SUNK COST 602 603 604 605 606 607 608 609 610 IRRnpvbeta NPV RELEVANT STEIN in invest, EAA RATION PBP ARR MI-np-ir REPLACEMENT S HPR GMAM EAC MACRS BETA LEVERED REPLACEMENT BOND OPTION TO WAIT EEE II Rea erences: ED12 120% WA 01:54 ENG 22-11-2019 BA