Celestial Crane Cosmetics is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Sales (units) 5,500 5,200 5,700 5,820 Sales price $42.57 $43.55 Variable cost per unit $22.83 Fixed costs, excluding depreciation $66,750 Accelerated depreciation rate 33% $44.76 $46.79 $22.97 $23.45 $23.87 $68,950 $69,690 $68,900 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. Celestial Crane Cosmetics pays a constant tax rate of 40%, and it has a required rate of return of 11%. When using accelerated depreciation, the project's net present value (NPV) is When using straight-line depreciation, the project's NPV is Using the depreciation method will result in the greater NPV for the project. No other firm would take on this project if Celestial Crane Cosmetics turns it down. How much should Celestial Crane Cosmetics 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? $1,318 $1,706 ○ $931 $1,551
Celestial Crane Cosmetics is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Sales (units) 5,500 5,200 5,700 5,820 Sales price $42.57 $43.55 Variable cost per unit $22.83 Fixed costs, excluding depreciation $66,750 Accelerated depreciation rate 33% $44.76 $46.79 $22.97 $23.45 $23.87 $68,950 $69,690 $68,900 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. Celestial Crane Cosmetics pays a constant tax rate of 40%, and it has a required rate of return of 11%. When using accelerated depreciation, the project's net present value (NPV) is When using straight-line depreciation, the project's NPV is Using the depreciation method will result in the greater NPV for the project. No other firm would take on this project if Celestial Crane Cosmetics turns it down. How much should Celestial Crane Cosmetics 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? $1,318 $1,706 ○ $931 $1,551
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Celestial Crane Cosmetics is considering an investment that will have the following sales, variable costs, and fixed operating costs:
Year 1
Year 2
Year 3
Year 4
Sales (units)
5,500
5,200
5,700
5,820
Sales price
$42.57
$43.55
$44.76
$46.79
Variable cost per unit
Fixed costs, excluding depreciation
Accelerated depreciation rate
$22.83 $22.97 $23.45
$66,750 $68,950 $69,690
33%
45%
15%
$23.87
$68,900
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. Celestial Crane Cosmetics pays a constant tax rate of 40%, and it has a required rate of return of 11%.
When using accelerated depreciation, the project's net present value (NPV) is
When using straight-line depreciation, the project's NPV is
Using the
depreciation method will result in the greater NPV for the project.
No other firm would take on this project if Celestial Crane Cosmetics turns it down. How much should Celestial Crane Cosmetics 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?
$1,318
$1,706
$931
$1,551
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