Question

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 Black Sheep Broadcasting: Black Sheep Broadcasting is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 2 4,000 Year 3 4,200 Year 4 4,250 Unit sales (units) Sales price $39.88 $40.15 $41.55 Year 1 3,500 $38.50 $22.34 $37,000 33% Variable cost per unit Fixed operating costs except depreciation Accelerated depreciation rate $22.85 $37,500 45% $23.67 $38,120 15% $23.87 $39,560 7%

Answer 1

rate positively ..

G H Ans a Computation of NPV using Acceperated depreciation method Year -0 Year -1 Year -2 initial investment 10000 Year -3 Year -4 7.00% Depreciation rate Depreciation amount accelerated method straight line 33.00% 3,300 2,500 45.00% 4,500 2,500 15.00% 1,500 2,500 700 2,500 Unit sold sales price Variable cost Contribution per unit Total contribution 3500 38.50 22.34 16.16 56,560 4000 39.88 22.85 17.03 68,120 4200 40.15 23.67 16.48 69,216 4250 41.55 23.87 17.68 75,140

G H Computation of NPV using accelerated method Year -2 Year -3 Year-4 Year -0 Year -1 -10000 initial investment ET Revenue Fixed cost Depreciation amount Profit before tax Tax @ 40% Profit after tax Operating cash flow Total cash flow PVIF @ 11% present value 56,560 37,000 3,300 16,260 6,504 9,756 13,056 13,056 0.9009 11,762 68,120 37,500 4,500 26,120 10,448 15,672 20,172 20,172 0.8116 16,372 69,216 38,120 1,500 29,596 11,838 17,758 19,258 19,258 0.7312 14,081 75,140 39,560 700 34,880 13,952 20,928 21,628 21,628 0.6587 14,247 (10,000) 1.0000 (10,000) 46,463 Ans = 46,463

Ans = 46,463 Computation of NPV using Straight line depreciation Year -2 Year -3 Year -4 Year -0 Year -1 -10000 initial investment Revenue Fixed cost Depreciation amount Profit before tax Tax @ 40% Profit after tax Operating cash flow Total cash flow PVIF @ 11% present value Ans = 56,560 37,000 2,500 17,060 6,824 10,236 12,736 12,736 0.9009 11,474 68,120 37,500 2,500 28,120 11,248 16,872 19,372 19,372 0.8116 15,723 69,216 38,120 2,500 28,596 11,438 17,158 19,658 19,658 0.7312 14,373 75,140 39,560 2,500 33,080 13,232 19,848 22,348 22,348 0.6587 14,721 (10,000) 1.0000 (10,000) 46,292 46,292

А в G H Ans = 46,292 Using ACCELERETED depreciation method will result in the greater NPV for the project 52 Ansc 53 54 55 Ans d 56 Cash flow PVIE Present value Year -1 300 0.9009 270 Year -2 300 0.8116 243 Year -3 300 0.7312 219 Year -4 300 0.6587 198 931 ans = 931 Ans e Correct answer is option : The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost 66