Question

6. Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Lumbering Ox Truckmakers: Lumbering Ox Truckmakers is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 3 Year 4 4.400 Year 1 4,200 $29.82 $12.15 $41,000 Unit sales (units) Sales price Variable cost per unit Fixed operating costs except depreciation Accelerated depreciation rate Year 2 4.100 $30.00 $13.45 $41,670 $33.19 4,300 $30.31 $14.02 $41,890 $14.55 $40,100 790 This project will require an investment of $25,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Lumbering Ox Truckmakers pays a constant tax rate of 40%, and it has a required rate of return of 119

Answer 1

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2 e 7 * $ 9 w x 2 v 1x ENG 01:06 21-03-2020 23 AW887 - X fix AW AX AY A Z BA BB BC BD BE A UNITS 887 888 889 890 891 892 893 894 ACCELERATED DEPRECIATION 4200 29.82 12.15 4100 30 13.45 2 4300 30.31 14.02 4400 33.19 14.55 4 VC -25000 895 896 897 898 899 900 YEAR COST OF MACHINE SALES VARIABLE COST FIXED COST DEPRECIATION PBT TAX @40% PAT DEPRECIATION CFAT 125244 51030 41000 8250 24964 9985.6 14978.40 8250 23228 123000 55145 41670 11250 14935 5974 8961.00 11250 20211 130333 60286 41890 3750 24407 9762.8 14644.20 3750 18394 146036 64020 40100 1750 40166 16066.4 24099.60 1750 25850 901 902 903 904 905 -25000 TERMINAL CFAT PV FACTOR @11% PV OF CFAT 23228 0.9009 20926 20211 0.8116 1 6404 18394 0.7312 13450 25850 0.6587 17028 - 25000 42808 NPV 906 907 908 909 910 ANSWER : NPV = 42808 ... HPR GMAM EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBITLEASE SLM GOLF ... :

W v L ** - 00-15 ENG 21-03-2020 23 AW933 - X fix AV AW AY A Z BA BB Formula BoC BD BE A UNITS 910 911 912 913 STRAIGHT LINE SP 4200 29.82 12.15 1 4100 30 13.45 4300 30.31 14.02 4400 33.19 14.55 4 VC 914 -25000 915 916 917 918 919 YEAR COST OF MACHINE SALES VARIABLE COST FIXED COST DEPRECIATION PBT TAX @40% PAT DEPRECIATION CFAT 920 125244 51030 41000 6250 26964 10785.6 16178.4 6250 22428.4 123000 55145 41670 6250 19935 7974 11961 6250 18211 130333 60286 41890 6250 21907 8762.8 13144.2 6250 19394.2 146036 64020 40100 6250 35666 14266.4 21399.6 6250 27649.6 921 922 923 924 925 926 -25000 927 928 TERMINAL CFAT PV FACTOR @11% PV OF CFAT 22428.4 0.9009 20206 18211 0.8116 14780 19394.2 0.7312 14181 27649.6 0.6587 18214 -25000.00 42381 NPV 929 930 931 ANSWER: NPV = 42381 932 933 2.3 D ... HPRGMAM EAC MACRS RELEVANT MI-mp-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF ... :

W 2 v 1x ENG 00-16 21-03-2020 23 BA BB BC BD BE A AW954 - X Fax AV AW AY Formula AZ 931 932 933 0.3 934 ANSWER USING ACCELERATED DEPRECIATION METHOD WILL RESULT IN HIGHEST NPV 935 936 Q.4 REDUCTION IN NPV = 600 X PVIFA @11% 4 YEARS 937 600 X 3.1024 938 ANSWER:C: 1861 939 940 9.5 941 ANSWER Increase the amount of the initial investment by $4,000. 942 943 944 945 946 947 948 949 950 951 952 953 954 ... HPR GMAM EAC MACRS RELEVANT Mi-mp-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF ... ►