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 Garida Co.: Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 3 Year 2 Year 4 Unit sales 4,200 4,100 4,300 4,400 Sales price $29.82 $30.00 $30.31 $33.19 Variable cost per unit $12.15 $13.45 $14.02 $14.55 Fixed operating costs $41,000 $41,670 $41,890 $40,100 This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at 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. Garida t pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project'ss 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 $72,774 O$63,282 O$75,938 O $50,626 Now determine what the project's NPV would be when using straight-line depreciation $59,317 depreciation method will result in the highest NPV for the Using the |$78,049 No other firm would take on this project if Garida turns it down. How much should Garid e NPV of this project if it discovered that this $62,439 project would reduce one of its division's net after-tax cash flows by $400 for each year year project? $81,171 O$1,241

Answer 1

fix -29.82-12.15 СЗ А В C E F G Н K М Contributio Fixed Sale Depreci Operating Total cash Present Year units PVIF@11% |value 1.000 $ -11,250 0.901 $ 22,442 0.812 15,939 0.731 $ 15,441 0.659 20,709 Depreciation |Таx@25% cash flowsInvestment flows |РAT ation 1 РВT costs n per unit 2 (11,250) (11,250) 0 4,200 $ 4,100 $ 4,300 $ 4 4,400 $ 17.67 $ 41,000$ 16.55 $ 41,670 $ 16.29 $ 41,890 $ 18.64 $ 40,100 $ $ 33,214 $8,304$ 24,911 $ $ 26,185 $6,546$19,639 $ 28,157 $7,039$21,118$ $ 41,916 10,479 31,437 $ $24,911 3 1 24,911 $ 19,639 $ 21,118 4 2 19,639 5 3 21,118 6 $31,437 31,437 7 $63,281 Net present value 9 Total cash Sale Contributio Fixed Depreci Operating Present |Таx@25% PVIF@11% value 1.000 S -15,000 0.901 S23,286 0.812 S 16,700 0.731 $ 16,127 0.659 21,326 10 Year units Depreciation |РAT ation cash flows Investment flows costs РВT n per unit (15,000) 11 (15,000) 0 4,200 $ 4,100 $ 4,300 $ 44,400 $ 17.67 $ 41,000 $ 16.55 $ 41,670 $ 16.29 $41,890 $ 18.64 $ 40,100 $ 3,750 29,464 7,366 $ 22,098 $3,750 $25,848 3,750 22,435 $5,609 $ 16,826$3,750 20,576 3,750 24,407$6,102 $ 18,305 $3,750 22,055 3,750 38,166 9,542$ 28,625$ 3,750 32,375 12 1 25,848 13 2 20,576 14 3 22,055 15 32,375 16 $62,439 17 Net present value 18 19 NPV under 100% bonus $63,282 $62,439 20 NPV under SLM 21 Using the 100% bonus depreciation will result in the highest NPV for the project. $ 1,241 -PV(11%,4,-400) 22 Reduction in cash flows

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