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
icon
Related questions
Question
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
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
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 5 steps with 6 images

Blurred answer
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education