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Unit sales Sales price Variable cost per unit Fixed operating costs Year 1 5,500 $42.57 $22.83 $66,750 Year 2 5,200 Year 3 5,700 $43.55 $44.76 $22.97 $23.45 $68,950 $69,690 Year 4 5,820 $46.79 $23.87 $68,900

Unit sales Sales price Variable cost per unit Fixed operating costs Year 1 5,500 $42.57 $22.83 $66,750 Year 2 5,200 Year 3 5,700 $43.55 $44.76 $22.97 $23.45 $68,950 $69,690 Year 4 5,820 $46.79 $23.87 $68,900

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
Problem 1PS
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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
3 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 The 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 used. This truck could be sold for $12,000, after taxes, if the project is rejected. What should Garida do to take this information into account? Increase the NPV of the project by $12,000. Increase the amount of the initial investment by $12,000. The company does not need to do anything with the value of the truck because the truck is a sunk cost. S A-2 ac N L
Transcribed Image Text:3 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 The 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 used. This truck could be sold for $12,000, after taxes, if the project is rejected. What should Garida do to take this information into account? Increase the NPV of the project by $12,000. Increase the amount of the initial investment by $12,000. The company does not need to do anything with the value of the truck because the truck is a sunk cost. S A-2 ac N L
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