Question

please conplete all parts to the 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: Year 3 Year 1 Year 2 Year 4 4,300 Unit sales 4,200 4,400 4,100 $29.82 $30.00 $30.31 $33.19 Sales price Variable cost per unit $12.15 $13.45 $14.02 $14.55 Fixed operating costs $41,000 $41,670 $41,890 $40,100 This project will require an investment of $25,000 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. $66,938 $44,626 $55,782 $64,149

Answer 1

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FOR 100% BONUS DEPRECIATION = AFTER TAX COST OF MACHINE = 25000*(1-0.25) = 18750

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 Merge & Center Conditional Format Formatting as Table Styles Paste в IU* 000 Cell Insert Delete Format Sort & Find & % Format Painter Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing fox BD499 AV AW AX AY AZ BА ВВ ВС BD ВЕ 494 UNITS 4200 4100 4300 4400 29.82 495 100% BONUS DEPRECIATION SP 30 30.31 33.19 496 VC 12.15 13.45 14.02 14.55 497 YEAR 0 1 2 COST OF MACHINE (AFTER TAX) -18750 498 SALES 499 125244 123000 130333 146036 51030 500 VARIABLE COST 55145 60286 64020 501 41890 FIXED COST 41000 41670 40100 502 DEPRECIATION TAX SHIELD 41916 503 РВT 33214 26185 28157 504 8303.5 ТАX 6546.25 7039.25 10479 24910.50 21117.75 505 PAT 19638.75 31437.00 506 DEPRECIATION 0 0 0 0 CFAT 19639 31437 507 24911 21118 508 -18750 509 TERMINAL CFAT 24911 19639 21118 31437 510 PV FACTOR @11% 1 0.9009 0.8116 0.7312 0.6587 15441.30 511 PV OF CFAT 22442.34 55782 NPV -18750.00 15939.45 20708.53 512 ANSWER NPV = 55782 EAC MACRS GO I REPLACEMENTS HPR GMAM NPV RELEVANT MI-np-i BETA LEVERED STEIN indiffEPS EBIT LEASE REPLACEMENT BOND OPTION TO WAIT STRAIGHT LINE erences: ED12 130% WA 07:09 1ENG 20-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins E AutoSum Cut A A Wrap Text Calibri 11 General Copy Fill Merge & Center Paste в IU* 000 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 AV515 Formula Bar AV AW AX AY AZ BА ВВ ВС BD ВЕ 515 UNITS 4200 4100 4300 4400 516 STRAIGHT LINE SP 29.82 30 30.31 33.19 517 VC 12.15 13.45 14.02 14.55 518 YEAR 0 1 2 519 COST OF MACHINE -25000 SALES 520 125244 123000 130333 146036 521 VARIABLE COST 51030 55145 60286 64020 41670 522 41890 FIXED COST 41000 40100 DEPRECIATION [20000/4] 523 6250 6250 6250 6250 524 РBT 26964 19935 21907 35666 ТАX 525 6741 4983.75 5476.75 8916.5 26749.5 526 PAT 20223 14951.25 16430.25 6250 527 DEPRECIATION 6250 6250 6250 21201.25 528 CFAT 22680.25 32999.5 26473 529 -25000 21201.25 22680.25 530 TERMINAL CFAT 26473 32999.5 531 PV FACTOR @11% 1 0.9009 0.8116 0.7312 0.6587 -25000.00 16583.60 54378 NPV 532 PV OF CFAT 23849.55 17207.41 21737.79 533 ANSWER: NPV = 54378 GO I EAC MACRS REPLACEMENT S NPV RELEVANT MI-np-in HPR GMAM BETA LEVERED OPTION TO WAIT STEIN indiffEPS EBIT LEASE REPLACEMENT BOND STRAIGHT LINE erences: DX15 130% WA 07:10 B ENG 20-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum - Cut AC Wrap Text Calibri 11 General Copy Fill Merge & Center Insert Delete Format Paste +.0 .00 .00 0 Conditional Format Cell Sort & Find & BIU % Format Painter Clear Filter Select Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing fox AW473 AU AV AW AX AY AZ BА ВВ ВС BD 473 474 475 476 477 478 479 Q.3 USING 100% BONUS DEPRECIATION METHOD WILL RESULT IN HIGHEST NPV 480 ANSWER 481 Q.4 482 REDUCTION IN NPV = 600 X PVIFA @11% 4 YEARS 600 X 3.1024 483 1861 484 ANSWER 485 486 IF PROJECT WOULD NOT HAVE BEEN TAKEN Q.5 487 COMPANY COULD REALIZE 18000 FROM SALE OF TRUCK sO IT REPRESENTS AN OPPORTUNITY COST 488 489 ANSWER Increase the amount of the initial investment by $18,000 490 491 BETA LEVERED EAC MACRS NPV RELEVANT REPLACEMENT S REPLACEMENT GD I BOND MI-np-ir STEIN indiffEPS EBIT LEASE HPR GMAM OPTION TO WAIT STRAIGHT LINE II Rea erences: ED12 130% EEE WA 07:12 tENG 20-11-2019