McFann spent $1,750 on a marketing study to estimate the number of units that it can sell each year. What should McFann do to take this informationinto account?The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost.Increase the NPV of the project $1,750.Increase the amount of the initial investment by $1,750. Companies invest in expansion projects with the expectation of increasing the earnings of its business.Consider the case of McFann Co.:McFann Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:Year 4Year 34,100 4,3004,400$30.31$33.19$30.00$13.45 $14.02 $14.55$41,670 $41,890 $40,100Year 1 Year 2Unit sales.4,200$29.82Sales priceVariable cost per unit$12.15Fixed operating costs $41,000This project will require an investment of $20,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation att=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.McFann 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 presentvalue (NPV) would be under the new tax law.Which of the following most closely approximates what the project's net present value (NPV) would be under the new tax law?(Hint: Round your finalanswer to two decimal places and choose the value that most closely matches your answer.)$68,460.40$59,530.78$47,624.62$71,436.94Which of the of the following most closely approximates what the project's NPV would be when using straight-line depreciation? (Hint: Round yourfinal answer to two decimal places and choose the value that most closely matches your answer.)Ⓒ$58,408.84Using the$67,170.17$55,488.40$73,011.05depreciation method will result in the highest NPV for the project.No other firm would take on this project if McFann turns it down. Which of the following most closely approximates how much McFann should reducethe NPV of this project, assuming it is discovered that this project would reduce one of its division's net after-tax cash flows by $400 for each year ofthe four-year project? (Hint: Round your final answer to two decimal places and choose the value that most closely matches your answer.)$1,240.98$744.59$1,365.08$1,054.83

Sunk cost is a foregone cost that is already spent and it can't be reversed. It remains the same no…

Answered: McFann spent $1,750 on a marketing…

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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You are evaluating a project for The Farstroke golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Farstroke to be $400 per unit and sales volume to be 1,000 units in year 1; 1,500 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets, which can be depreciated using bonus depreciation. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?
You are evaluating a project for The Farstroke golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Farstroke to be $450 per unit and sales volume to be 1,200 units in year 1; 1,325 units in year 2; and 1,000 units in year 3. The project has a 3-year life. Variable costs amount to $250 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $150,000 in assets, which can be depreciated using bonus depreciation. The actual market value of these assets at the end of year 3 is expected to be $30,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What is the operating cash flow for the project in year 2? Note: Enter your answer as a whole number. Operating cash flow
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The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV to zero and solve for the variable in question. Martin Enterprises needs someone to supply it with 155,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost $1,950,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that, in five years, this equipment can be salvaged for $165,000. Your fixed production costs will be $280,000 per year, and your variable production costs should be $10.90 per carton. You also need an initial investment in net working capital of $145,000. The tax rate is 25 percent and you require a return of 14 percent on your investment. Assume that the price per carton is $17.50.…
Consider equipment for the expansion of a production line that will cost $600,000 up front (i.e., today, t = 0). The production line will be depreciated using a 3-year straight-line schedule. At the end of Year 3, the used equipment will have no value. The new line will generate earnings according to the schedule below. What is the Average Accounting Return (AAR) of the new production facility? Answer with a number rounded to three decimal places, e.g., 4.0877% should be entered as 4.088. Year 01 Earnings = $24,500 Year 02 Earnings = $26,000 Year 03 Earnings = $27,250
Harry is trying to evaluate a two year project using NPV. There is uncertainty as to the level of sales (in units) in each of the two years: Year 1 Sales units Probability Year 2 Sales units Probability 10,000 0.3 8,000 0.2 10,000 0.8 15,000 0.7 20,000 0.6 10,000 0.4 Required: (a) On what expected level of sales in Year 1 and 2 should Harry base his NPV calculation? (b) Imagine that the project outlay is £230,000 and each unit sold has a contribution of £10. If Harry’s cost of capital is 10%, what is the project’s…
Kindly help me solve this problem using Excel. Have to calculate the payback period for the project, calculate the NPV for the project and calculate the IRR for the project.
Please solve attached question normally, not using excel. thanks!
Two alternative machines will produce the same product, but one is capable of higher quality work, which can be expected to return greater revenue. The following are relevant data. Determine which is the better alternative, assuming repeatability and using SL. depreciation, an income-tax rate of 26%, and an after-tax MARR of 11%. Capital investment Life Calculate the AW value for the Machine A AWA(11%) 5 (Round to the nearest dollar) Terminal BV (and MV) Annual receipts Annual expenses Machine A $18,000 11 years $4,000 $157,000 $129,000 Click the icon to view the interest and annuity table for discrete compounding when the MARR is 11% per year. Machine $29,000 6 years 50 $178,000 $164,000

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McFann spent $1,750 on a marketing study to estimate the number of units that it can sell each year mto account? The company does not need to do anything with the cost of the marketing study because t Increase the NPV of the project $1,750. Increase the amount of the initial investment by $1,750.