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 McFann Co.: McFann 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 5,500 $42.57 $22.83 $66,750 Year 2 5,200 $43.55 $22.97 $68,950 Year 3 5,700 $44.76 $23.45 $69,690 Year 4 5,820 $46.79 $23.87 $68,900 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. McFann 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. O $125,023 $93,767

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins E AutoSum - Cut Wrap Text Calibri 11 General 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 Clipboard Styles Font Alignment Number Cells Editing fox BD611 AU AV AW AX AY AZ BА ВВ ВС BD ВЕ 607 5500 5200 5820 UNITS 5700 100% bonus depreciation 42.57 43.55 44.76 608 SP 46.79 609 VC 22.83 22.97 23.45 23.87 610 YEAR 0 1 2 611 -7500 AFTER TAX COST OF MACHINE 255132 612 SALES 234135 226460 272317.8 613 VARIABLE COST 125565 119444 133665 138923.4 614 68950 FIXED COST 66750 69690 68900 615 DEPRECIATION 0 0 616 38066 51777 РВT 41820 64494.4 TAX @25% 10455 12944.25 617 9516.5 16123.6 31365 618 PAT 28549.5 38832.75 48370.8 619 DEPRECIATION 0 0 0 0 31365 620 CFAT 28549.5 38832.75 48370.8 621 38832.75 31365 28549.5 48370.8 622 TERMINAL CFAT -7500 PV FACTOR @11% 0.8116 0.7312 623 1 0.9009 0.6587 28394.17 624 -7500.00 28256.76 23171.41 31863.34 104186 NPV NPV 104186(ROUNDED) [ROUNDED] 625 ANS 1 626 NOTE: AFTER TAX COST OF MACHINE = 10000*(1-0.25) 7500 [100% BONUS DEPRECIATION CASE] REPLACEMENT BOND 627 REPLACEMENT S NPV RELEVANT BETA LEVERED STRAIGHI HPR GMAM OPTION TO WAIT invest, EAA STEIN indiffEPS EBIT LEASE MI-np-in EAC MACRS erences: ED12 120% WA 07:56 ENG 22-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Page Layout File Home Insert Formulas Data Review View Add-Ins Z AutoSum Cut AC Wrap Text Calibri 11 General Copy Fill Conditional Format Formatting as Table Styles Merge & Center Insert Delete Format Paste в IU* 090 Cell Sort & Find & % Format Painter Clear Filter Select Number Styles Clipboard Font Alignment Cells Editing fox AY647 AU AV AW АX AY AZ BА ВВ ВС BD ВЕ 628 UNITS 5500 5200 5700 5820 629 42.57 630 STRAIGHT LINE SP 43.55 44.76 46.79 22.83 23.87 631 VC 22.97 23.45 632 YEAR 1 2 3 4 COST OF MACHINE -10000 633 634 SALES 234135 255132 272317.8 226460 635 133665 138923.4 VARIABLE COST 125565 119444 68900 636 FIXED COST 66750 68950 69690 2500 2500 637 DEPRECIATION 2500 2500 49277 638 РВT 39320 35566 61994.4 8891.5 639 TAX @25% 9830 12319.25 15498.6 36957.75 29490 640 PAT 26674.5 46495.8 DEPRECIATION 641 2500 2500 2500 2500 39457.75 31990 29174.5 48995.8 642 CFAT 643 31990 39457.75 644 TERMINAL CFAT -10000 29174.5 48995.8 645 PV FACTOR @11% 1 0.9009 0.8116 0.7312 0.6587 28851.17 103625 NPV 646 -10000 28819.82 23678.68 32275.05 NPV 103625 (ROUNDED) 647 ANS 2 648 HPR GMAM STRAIGHI BETA LEVERED OPTION TO WAIT REPLACEMENTS EAC MACRS BOND STEIN indiffEPS EBIT LEASE invest, EAA MI-np-in NPV RELEVANT REPLACEMENT erences: ED12 Rea 120% WA 07:55 ENG 22-11-2019

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 & % .00 0 Format Painter Clear Filter Select Formatting as Table Styles Editing Clipboard Font Alignment Number Styles Cells fox AW664 ВС AU AV AW AX AY AZ ВВ BD ВЕ 648 649 Q.1 104186 650 Q.2 103625 651 BONUS Q.3 USING 100% BONUS DEPRECIATION METHOD WILL RESULT IN HIGHEST NPV 652 ANSWER 653 600 X PVIFA @11% 4 YEARS 654 Q.4 REDUCTION IN NPV = 655 600 X 3.1024 656 1861 ANSWER: 657 658 Q.5 ANSWER The company does not need to do anything with the cost of the marketing study because 659 the marketing study is a sunk cost 660 661 662 663 664 665 666 667 STRAIGHI NPV RELEVANT STEIN indiffEPS EBIT invest, EAA MI-np-in REPLACEMENTS HPR GMAM EAC MACRS BETA LEVERED REPLACEMENT BOND OPTION TO WAIT LEASE Rea + erences: ED12 120% WA 07:57 ENG 22-11-2019 BA