Companies invest in exparsion projects with the expectation of increasing the ea

Question

Companies invest in exparsion projects with the expectation of increasing the earnings of its business Consider the case of Yeatman Co.: Yeatman Co. is considering an investment that will have the following sales, variable costs, and foxed operating costs: Year 1 Year 2 Year 3 Year 4 3,500 4,000 4,200 4,250 $38.50 $39.88 $40.15 $41.55 $22.34 $22.85 $23.67 $23.87 Fixed operating costs except depreciation $37,000 $37,500 $38,120 $39,560 7% Unit sales Sales price Variable cost per unit 33% 45% 15% This project will require an investment of $20,000 in new Determine what the project's net present value (NPV) equipment. The equipment will have no salvage value at would be when using accelerated depreciation. 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. O $39,736 O $35,762 O $45,696 O $31,789 Now determine what the project's NPV would be when using straight-line depreciation. $37424 $39,394 $37,424 $49,243 ,303 Using the depreciation method will result in the highest NPV for the pr s45 W. 09

Explanation / Answer

Calculation of NPV NPV = Cash Inflows- Cash Outflows Year 1 2 3 4 Sales 38.5 39.88 40.15 41.55 VC 22.34 22.85 23.67 23.87 Contribution 16.16 17.03 16.48 17.68 Units 3500 4000 4200 4250 Total 56560 68120 69216 75140 Fixed Cost 37000 37500 38120 39560 Depreciation 6600 9000 3000 1400 Net Profit 12960 21620 28096 34180 Tax@ 40% 5184 8648 11238.4 13672 Net Profit 7776 12972 16857.6 20508 Savings in Tax due to dep 2640 3600 1200 560 10416 16572 18057.6 21068 Cost of capital @ 11% 0.900901 0.8116224 0.731191 0.658730974 Net Cash Inflows 9383.784 13450.207 13203.56 13878.14416 Total Cash Inflows 49915.7 NPV = 51789-20000 The correct answer is $ 31789 Using the straight line depreciation method will result in highest NPV for the project

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.