Question

Yeatman 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 4,800 5,100 5,000 5,120 $22.33 $23.45 $23.85 $24.45 $9.45$10.85 $11.95 $12.00 Fixed operating costs except depreciation $32,500 $33,450 $34,950 $34,875 7010 Unit sales Sales price Variable cost per unit Accelerated depreciation rate 33% 45% 15%

Answer 1

Req 1.
				Year 0	Year 1	Year 2	Year 3	Year 4
Units Sales					4800	5100	5000	5120
Selling price per unit					22.33	23.45	23.85	24.45
Variable ccost per unit					9.45	10.85	11.95	12
CM per unit					12.88	12.6	11.9	12.45
Total Contribution (Unit sales * CM per unit)					61824	64260	59500	63744
Less: Fixed cost
Depreciation					6600	9000	3000	1400
Other fixed cost					32500	33450	34950	34875
Net Income before tax					22724	21810	21550	27469
Less: Tax @ 40%					9089.6	8724	8620	10987.6
After tax income					13634.4	13086	12930	16481.4
Add: Depreciation					6600	9000	3000	1400
Annual cashflows					20234.4	22086	15930	17881.4
Initial Investment				-20000
Cashflows of the year				-20000	20234.4	22086	15930	17881.4
PVF at 11%				1	0.900901	0.811622	0.731191	0.658731
Present value of cashflows				-20000	18229.19	17925.49	11647.88	11779.03
NPV				39581.6
Answer is $ 39581
Req 2.
NPV with SLM
				Year 0	Year 1	Year 2	Year 3	Year 4
Units Sales					4800	5100	5000	5120
Selling price per unit					22.33	23.45	23.85	24.45
Variable ccost per unit					9.45	10.85	11.95	12
CM per unit					12.88	12.6	11.9	12.45
Total Contribution (Unit sales * CM per unit)					61824	64260	59500	63744
Less: Fixed cost
Depreciation		(20000/4)			5000	5000	5000	5000
Other fixed cost					32500	33450	34950	34875
Net Income before tax					24324	25810	19550	23869
Less: Tax @ 40%					9729.6	10324	7820	9547.6
After tax income					14594.4	15486	11730	14321.4
Add: Depreciation					5000	5000	5000	5000
Annual cashflows					19594.4	20486	16730	19321.4
Initial Investment				-20000
Cashflows of the year				-20000	19594.4	20486	16730	19321.4
PVF at 11%				1	0.900901	0.811622	0.731191	0.658731
Present value of cashflows				-20000	17652.61	16626.9	12232.83	12727.6
NPV				39240
Answer is $ 39240
Using Accelerated method will result in highest NPV for the project.
Req :
Reduction in Cashflows for 4 years by				500
Annuity PVF at 11% fr 4 yrs				3.10245
Reduction in NPV				1551.225
Answer is $ 1551