Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Fox Co.: Fox 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 except depreciation Accelerated depreciation rate This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Fox pays at 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. Year 3 Year 1 Year 2 5,500 5,200 5,700 $42.57 $43.55 $44.76 $22.83 $22.97 $23.45 $66,750 $68,950 $69,690 15% 33% 45% O $82,622 O $66,098 O $99,146 O $74,360 Year 4 5,820 $46.79 $23.87 $68,900 7% Determine what the project's net present value (NPV) would be when using accelerated depreciation.

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
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 Fox Co.:
Fox 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 except depreciation
Accelerated depreciation rate
This project will require an investment of $10,000 in new
equipment. The equipment will have no salvage value at
the end of the project's four-year life. Fox 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.
Year 1
Year 2
Year 3
Year 4
5,500
5,200
5,700
5,820
$42.57 $43.55
$44.76
$46.79
$22.83 $22.97 $23.45 $23.87
$66,750
$68,950
$69,690 $68,900
33%
15%
7%
45%
Determine what the project's net present value (NPV)
would be when using accelerated depreciation.
O $82,622
$66,098
O $99,146
O $74,360
Aa Aa
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 Fox Co.: Fox 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 except depreciation Accelerated depreciation rate This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Fox 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. Year 1 Year 2 Year 3 Year 4 5,500 5,200 5,700 5,820 $42.57 $43.55 $44.76 $46.79 $22.83 $22.97 $23.45 $23.87 $66,750 $68,950 $69,690 $68,900 33% 15% 7% 45% Determine what the project's net present value (NPV) would be when using accelerated depreciation. O $82,622 $66,098 O $99,146 O $74,360 Aa Aa
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Risk Management Techniques
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
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