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
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 2E: Average rate of returncost savings Maui Fabricators Inc. is considering an investment in equipment...
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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.
![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:
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
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
= 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.
Determine what the project's net present value (NPV) would be under the new tax law.
$46,337
$59,209
$61,783
$51,486
Now determine what the project's NPV would be when using straight-line depreciation.
Using the
depreciation method will result in the highest NPV for the project.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9f37b173-8282-4748-a829-cf1e2f70397b%2F2d8dd32d-3225-4718-844d-645f6c1b3aff%2Fbvy221m_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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:
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
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
= 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.
Determine what the project's net present value (NPV) would be under the new tax law.
$46,337
$59,209
$61,783
$51,486
Now determine what the project's NPV would be when using straight-line depreciation.
Using the
depreciation method will result in the highest NPV for the project.
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