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This project will require an investment of $20,000 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. Garida 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

This project will require an investment of $20,000 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. Garida 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
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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This project will require an investment of $20,000 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. Garida 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.
 

 

### Expansion Project Analysis for Garida Co. #### Investment Details: Garida Co. is evaluating an investment with anticipated sales, variable costs, and fixed operating costs outlined as follows: | Year | Year 1 | Year 2 | Year 3 | Year 4 | |------------|--------|--------|--------|--------| | **Unit Sales** | 3,500 | 4,000 | 4,200 | 4,250 | | **Sales Price** | $38.50 | $39.88 | $40.15 | $41.55 | | **Variable Cost per Unit** | $22.34 | $22.85 | $23.67 | $23.87 | | **Fixed Operating Costs** | $37,000 | $37,500 | $38,120 | $39,560 | #### Project Considerations: - An investment of $20,000 in new equipment is required. - The equipment benefits from 100% bonus depreciation at time zero under the new tax law, meaning full depreciation occurs at purchase. - No salvage value is expected after four years. - A constant tax rate of 25% is applied. - The project's Weighted Average Cost of Capital (WACC) is 11%. #### Objective: Determine the project's net present value (NPV) under the current tax law. #### Potential NPV Outcomes: - $46,337 - $59,209 - $61,783 - $51,486 ### Additional Consideration: Calculate the project's NPV using straight-line depreciation to compare results. ### Inquiry: The _____________ depreciation method will yield the highest NPV for the project.
Transcribed Image Text:### Expansion Project Analysis for Garida Co. #### Investment Details: Garida Co. is evaluating an investment with anticipated sales, variable costs, and fixed operating costs outlined as follows: | Year | Year 1 | Year 2 | Year 3 | Year 4 | |------------|--------|--------|--------|--------| | **Unit Sales** | 3,500 | 4,000 | 4,200 | 4,250 | | **Sales Price** | $38.50 | $39.88 | $40.15 | $41.55 | | **Variable Cost per Unit** | $22.34 | $22.85 | $23.67 | $23.87 | | **Fixed Operating Costs** | $37,000 | $37,500 | $38,120 | $39,560 | #### Project Considerations: - An investment of $20,000 in new equipment is required. - The equipment benefits from 100% bonus depreciation at time zero under the new tax law, meaning full depreciation occurs at purchase. - No salvage value is expected after four years. - A constant tax rate of 25% is applied. - The project's Weighted Average Cost of Capital (WACC) is 11%. #### Objective: Determine the project's net present value (NPV) under the current tax law. #### Potential NPV Outcomes: - $46,337 - $59,209 - $61,783 - $51,486 ### Additional Consideration: Calculate the project's NPV using straight-line depreciation to compare results. ### Inquiry: The _____________ depreciation method will yield the highest NPV for the project.
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