Question

Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 2 Year 1 Year 3 Year 4 Unit sales 3,000 3,250 3,300 3,400 Sales price $17.25 $17.33 $17.45 $18.24 Variable cost per unit $9.03 $8.88 $8.92 $9.06 Fixed operating costs except depreciation $13,220 $12,500 $13,000 $13,250 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Fox pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be when using accelerated depreciation Determine what the project's net present value (NPV) would be when using accelerated depreciation. (Note: Round your intermediate calculations to the nearest whole number.) $13,832 O $16,598 O $12,449

Answer 1

NPV when using accelerated depreciation Depreciation rate 33.00% 45.00% 15.00% 7.00% less: less: less: YEAR sale units sales variable cost fixed cost depreciation EBT tax @40% EAT depreciation OCF initial investment: plant net cash flows pv @ 11% PRESENT VALUE NPV 3000 $51,750.00 $26,640.00 $12,500.00 $6,600.00 $6,010.00 $2,404.00 $3,606.00 $6,600.00 $10,206.00 3250 $56,322.50 $28,990.00 $13,000.00 $9,000.00 $5,332.50 $2,133.00 $3,199.50 $9,000.00 $12,199.50 3300 $57,585.00 $29,799.00 $13,220.00 $3,000.00 $11,566.00 $4,626.40 $6,939.60 $3,000.00 $9,939.60 3400 $62,016.00 $30,804.00 $13,250.00 $1,400.00 $16,562.00 $6,624.80 $9,937.20 $1,400.00 $11,337.20 less: add: -$20,000.00 -$20,000.00 1 $10,206.00 0.900900901 $9,194.59 $12,199.50 0.811622433 $9,901.39 $9,939.60 0.731191381 $7,267.75 $11,337.20 0.658730974 $7,468.16 -$20,000.00 $13,832

NPV when using straight line depreciation YEAR sale units sales less: variable cost less: fixed cost less: depreciation EBT less: tax @40% 3000 $51,750.00 $26,640.00 $12,500.00 $5,000.00 $7,610.00 $3,044.00 $4,566.00 $5,000.00 $9,566.00 2 3250 $56,322.50 $28,990.00 $13,000.00 $5,000.00 $9,332.50 $3,733.00 $5,599.50 $5,000.00 $10,599.50 3300 $57,585.00 $29,799.00 $13,220.00 $5,000.00 $9,566.00 $3,826.40 $5,739.60 $5,000.00 $10,739.60 3400 $62,016.00 $30,804.00 $13,250.00 $5,000.00 $12,962.00 $5,184.80 $7,777.20 $5,000.00 $12,777.20 EAT add: depreciation OCF initial investment: plant net cash flows pv @ 11% PRESENT VALUE NPV -$20,000.00 -$20,000.00 $9,566.00 0.900900901 $8,618.02 $10,599.50 0.811622433 $8,602.79 $10,739.60 0.731191381 $7,852.70 $12,777.20 0.658730974 $8,416.74 -$20,000.00 $13,491 Using accelerated method of depreciation will result in highest npv NPV = $2,172 700 X PVIFA(11%,4Years)