Question

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 2 Year 3 Year 4 Unit sales 5,500 5,200 5,700 5,820 Sales price $42.57 $43.55 $44.76 $46.79 Variable cost per unit $22.83 $22.97 $23.45 $23.87 Fixed operating costs $66,750 $68,950 $69,690 $68,900 This project will require an investment of $20,000 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. Garida 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. $77,349 $87,017 $111,189

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Page Layout Formulas File Home Insert Data Review View Add-Ins Z AutoSum Cut A Wrap Text Calibri 11 General ECopy Fill в IU- Merge & Center Paste 090 Conditional Format Cell Insert Delete Format Sort & Find & % Format Painter Clear Filter Select Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing fox AW549 AV AW AX AY AZ ВА В ВС BD ВЕ BF 549 UNITS 5500 5200 5700 5820 550 100% bonus depreciation 42.57 43.55 SP 44.76 46.79 551 VC 22.83 22.97 23.45 23.87 552 YEAR 0 1 4 553 AFTER TAX COST OF MACHINE -15000 554 SALES 234135 226460 255132 272317.8 555 119444 133665 138923.4 VARIABLE COST 125565 556 68950 69690 FIXED COST 66750 68900 557 DEPRECIATION 0 0 0 0 64494.4 558 РВT 41820 38066 51777 TAX @25% 9516.5 559 10455 12944.25 16123.6 48370.8 560 PAT 31365 28549.5 38832.75 561 DEPRECIATION 0 0 0 28549.5 562 CFAT 31365 38832.75 48370.8 563 48370.8 -15000 38832.75 564 TERMINAL CFAT 31365 28549.5 PV FACTOR @11% 0.9009 565 0.8116 0.7312 0.6587 -15000.00 566 28256.76 23171.41 28394.17 31863.34 96686 NPV NPV 96686(ROUNDED) 567 ANS 1 [ROUNDED] 568 NOTE: AFTER TAX COST OF MACHINE = 20000*(1-0.25) 15000 [100% BONUS DEPRECIATION CASE] invest, EAA 569 RATION PBP ARR EAC MACRS NPV RELEVANT STEIN i REPLACEMENT S HPR GMAM BETA LEVERED IRRnpvbeta MI-np-ir REPLACEMENT BOND OPTION TO WAIT Rea erences: DX15 120% W X 07:52 TENG 21-11-2019

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 ECopy Fill в IU- Merge & Center Paste $ % , 090 Conditional Format Cell Insert Delete Format Sort & Find & Format Painter Clear Filter Select Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing fox AW570 AV AW АХ AY AZ ВА ВВ ВС ВЕ BF 570 571 UNITS 5500 5200 5700 5820 572 43.55 STRAIGHT LINE SP 42.57 44.76 46.79 22.83 22.97 23.87 573 VC 23.45 574 YEAR 0 1 2 3 4 575 COST OF MACHINE -20000 272317.8 576 SALES 234135 226460 255132 119444 577 VARIABLE COST 125565 133665 138923.4 FIXED COST 66750 69690 578 68950 68900 5000 579 DEPRECIATION 5000 5000 5000 59494.4 580 РВT 36820 33066 46777 11694.25 14873.6 581 TAX @25% 9205 8266.5 44620.8 582 PAT 27615 24799.5 35082.75 583 DEPRECIATION 5000 5000 5000 5000 49620.8 32615 584 CFAT 29799.5 40082.75 585 -20000 32615 29799.5 586 TERMINAL CFAT 40082.75 49620.8 PV FACTOR @11% 587 1 0.9009 0.8116 0.7312 0.6587 29382.88 95564 NPV 588 -20000 24185.94 29308.16 32686.76 NPV 95564 (ROUNDED) 589 ANS 2 590 EAC MACRS NPV RELEVANT STEIN i HPR GMAM BETA LEVERED IRRnpvbeta RATION PBP ARR invest, EAA MI-np-ir REPLACEMENT S REPLACEMENT BOND OPTION TO WAIT E 120% erences: DX15 Rea W 07:54 TENG 21-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut AS 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 Clipboard Editing Font Alignment Number Styles Cells fox AV603 BA ВС AU AV AW AX AY AZ ВВ BD ВЕ 591 592 593 Q.3 USING 100% BONUS DEPRECIATION METHOD WILL RESULT IN HIGHEST NPV ANSWER 594 595 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 602 603 604 605 606 607 608 609 610 611 STEIN IRRnpvbeta invest, EAA MI-np-ir NPV RELEVANT i BOND RATION PBP ARR REPLACEMENT S HPR GMAM EAC MACRS BETA LEVERED REPLACEMENT OPTION TO WAIT