Question

Now determine what the project's NPV would be when using straight-line depreciation. Using the depreciation method will result in the highest NPV for the project. No other firm would take on this project if Yeatman turns it down. How much should Yeatman reduce the NPV of this project if it discovered that this project would reduce one of its division's net after-tax cash flows by $500 for each year of the four-year project? $931 $1,551 $1,318 $1,163 Yeatman spent $1,750 on a marketing study to estimate the number of units that it can sell each year. What should Yeatman do to take this information into account? The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost. Increase the NPV of the project $1,750. Increase the amount of the initial investment by $1,750.

Answer 1

c3 - X fix =22.33-9.45 A B C D E Sale Contributio Fixed 1 Year units in per unit costs Depreciation 20 3 1 4,800 $ 12.88 $ 32,500 $ - 2 5,100 $ 12.60 $ 33,450 $ 3 5,000 $ 11.90 $ 34,950 $ 45,120 $ 12.45 $ 34,875 $ F G H I J K L M N Depreci Operating Total cash Present PBT Tax@25% PAT Tation cash flows Investment flows PVIF@11% value (11,250) (11,250) 1.000 $ -11,250 $ 29,324 $ 7,331 $ 21,993 $ - $ 21,993 21,993 0.901 $ 19,814 $ 30,810 $ 7,703 $ 23,108 $ - $ 23,108 23,108 0.812 $ 18,755 $ 24,550 $ 6,138 $ 18,413 $ - $ 18,413 18,413 0.731 $ 13,463 $ 28,869 $ 7,217 $ 21,652 $ - $ 21,652 21,652 0.659 $ 14,263 0 Net present value $ 55,044 8 9 Contributio Fixed n per unit costs Depreciation PBT Tax@25% 10 Year units 11 0 12 1 4,800 13 2 5,100 14 31 5,000 15 4 5,120 $ $ $ $ 12.88 12.60 11.90 12.45 $ 32,500 $ 33,450 $ 34,950 $ 34,875 $ $ $ $ 3,750 3,750 3,750 3,750 $ 25,574 $ 27,060 $ 20,800 $ 25,119 $ $ $ $ 6,394 6,765 5,200 6,280 Depreci Operating Total cash Present PAT ation cash flows Investment flows PVIF@11% value (15,000) (15,000) 1.000 $ -15,000 $ 19,181 $ 3,750 $ 22,931 22,931 0.901 $ 20,658 $ 20,295 $ 3,750 $ 24,045 24,045 0.812 $ 19,515 $ 15,600 $ 3,750 $ 19,350 19,350 0.731 $ 14,149 $ 18,839 $ 3,750 $ 22,589 22,589 0.659 $ 14,880 16 Net present value $ 54,202 19 NPV under 100% bonus $55,045 | 20 NPV under SLM $54,202 21 Using the 100% bonus depreciation will result in the highest NPV for the project. 22 Reduction in cash flows $ 1,551 =PV(11%,4,-500) 23 Correct option is "The company does not need to do anything with the cost of the marketing study 24 because the marketing study is a sunk cost"

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