Companies invest in expansion 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 fixed operating costs: Unit sales Sales price Variable cost per unit Fixed operating costs Year 1 Year 2 Year 4 4,200 4,100 4,400 $29.82 $30.00 $33.19 $12.15 $13.45 $14.02 $14.55 $41,000 $41,670 $41,890 $40,100 Year 3 4,300 $30.31 This project will require an investment of $10,000 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. Yeatman 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.
Companies invest in expansion 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 fixed operating costs: Unit sales Sales price Variable cost per unit Fixed operating costs Year 1 Year 2 Year 4 4,200 4,100 4,400 $29.82 $30.00 $33.19 $12.15 $13.45 $14.02 $14.55 $41,000 $41,670 $41,890 $40,100 Year 3 4,300 $30.31 This project will require an investment of $10,000 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. Yeatman 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.
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:Companies invest in expansion 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 fixed operating costs:
Unit sales
Sales price
Variable cost per unit
Fixed operating costs
Year 2 Year 3
Year 4
4,100 4,300
4,400
$30.00
$30.31
$33.19
$12.15
$13.45
$14.02 $14.55
$40,100
$41,000 $41,670 $41,890
Year 1
4,200
$29.82
This project will require an investment of $10,000 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.
Yeatman 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.
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