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Companies invest in expansion projects with the expectation of increasing the earnings of its business Consider the case of Garida Co.: Garida Co. is considering an investment that will have the following sales, variable costs, and fixed Year 1 Year 2 5,500 5,200 $42.57 $43.55 $22.97 Unit sales Sales price Variable cost per unit $22.83 MEA DEO Year 3 5,700 $44.76 $23.45 CEO 600 Year 4 5,820 $46.79 $23.87 000

Companies invest in expansion projects with the expectation of increasing the earnings of its business Consider the case of Garida Co.: Garida Co. is considering an investment that will have the following sales, variable costs, and fixed Year 1 Year 2 5,500 5,200 $42.57 $43.55 $22.97 Unit sales Sales price Variable cost per unit $22.83 MEA DEO Year 3 5,700 $44.76 $23.45 CEO 600 Year 4 5,820 $46.79 $23.87 000

Essentials Of Investments
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
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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 Garida Co.: Garida 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 5,500 $42.57 Year 2 5,200 Year 3 Year 4 5,700 5,820 $43.55 $44.76 $46.79 $22.83 $22.97 $23.45 $23.87 $66,750 $68,950 $69,690 $68,900 This project will require an investment of $25,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecati 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. C 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 ( would be under the new tax law. A-2 a N
Transcribed Image Text: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 Garida Co.: Garida 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 5,500 $42.57 Year 2 5,200 Year 3 Year 4 5,700 5,820 $43.55 $44.76 $46.79 $22.83 $22.97 $23.45 $23.87 $66,750 $68,950 $69,690 $68,900 This project will require an investment of $25,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecati 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. C 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 ( would be under the new tax law. A-2 a N
Determine what the project's net present value (NPV) would be under the new tax law. $111,523 $83,642 O $74,349 Using the $92,936 Now determine what the project's NPV would be when using straight-line depreciation. No other firm would take on this project if Garida turns it down. How much should Garida 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 $700 for each year of the four-year project? $1,629 $2,389 $2,172 $1,303. depreciation method will result in the highest NPV for the project. e project will require an initial investment of $25,000, but the project will also be using a company-owned truck that is not currently being use is truck could be sold for $12,000, after taxes, if the project is rejected. What should Garida do to take this information into account? wwwww
Transcribed Image Text:Determine what the project's net present value (NPV) would be under the new tax law. $111,523 $83,642 O $74,349 Using the $92,936 Now determine what the project's NPV would be when using straight-line depreciation. No other firm would take on this project if Garida turns it down. How much should Garida 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 $700 for each year of the four-year project? $1,629 $2,389 $2,172 $1,303. depreciation method will result in the highest NPV for the project. e project will require an initial investment of $25,000, but the project will also be using a company-owned truck that is not currently being use is truck could be sold for $12,000, after taxes, if the project is rejected. What should Garida do to take this information into account? wwwww
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