Question

	Year 1	Year 2	Year 3	Year 4
Unit sales	4,200	4,100	4,300	4,400
Sales price	$29.82	$30.00	$30.31	$33.19
Variable cost per unit	$12.15	$13.45	$14.02	$14.55
Fixed operating costs except depreciation	$41,000	$41,670	$41,890	$40,100
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. Yeatman 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. $53,097 $55,405 $41,554 $46,171

Answer 1

	Year 1	Year 2	Year 3	Year 4
Sales [ Unit sales * Sales price ]	125244	123000	130333	146036
Variable cost	51030	55145	60286	64020
Fixed operating costs except depreciation	41000	41670	41890	40100
Depreciation	6600	9000	3000	1400
Earnings before tax	26614	17185	25157	40516
(-) Tax@40%	10646	6874	10063	16206
Net income	15968	10311	15094	24310
(+) Depreciation	6600	9000	3000	1400
Cash flow	22568	19311	18094	25710

NPV = 22568/(1+11%) + 19311/(1+11%)^2 + 18094/(1+11%)^3 + 25710/(1+11%)^4 - 20000

46171