Question

Attempts: 3 Keep the Highest: 3/5 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 $22.83 $66,750 Year 2 5,200 $43.55 $22.97 $68,950 Year 3 5,700 $44.76 $23.45 $69,690 Year 4 5,820 $46.79 $23.87 $68,900 This project will require an investment of $10,000 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.

** Hidden underneath the blue dropdown menu below, it says "No other firm would take on this project" and  "this project would reduce one of its"**

Answer 1

fix -42.57-22.83 A В C D Е F Н K М N Depreci Operating Sale 1 Year units Contributio Fixed Total cash cash flows Investment flows Present Depreciation |Таx@25% PVIF@11% value 1.000 $ 7,500 0.901 28,257 0.812 23,171 0.731 28,394 0.659 31,863 n per unit PBT PAT ation costs (7,500) 2 (7,500) 0 19.74 $ 66,750 $ 20.58 $68,950 $ 21.31 $ 69,690 $ 22.92 68,900 $ 5,500 $ 5,200 $ 35,700 $ 5,820 $ $ 41,820 10,455$31,365 $ 38,066 $9,517 $ 28,550 $ 51,777 12,944 $ 38,833 $ $ 64,494 16,124 $ 48,371 $ $ 31,365 $ 28,550 3 1 31,365 4 2 28,550 $38,833 $48,371 5 38,833 6 4 48,371 7 $ 104,186 Net present value 9 Contributio Fixed Depreci Operating Sale Total cash Present Depreciation PVIF@11% |value 1.000 $ -10,000 0.901 $ 28,820 10 Year units |Таx@25% cash flows Investment flows n per unit РBT РAT ation costs 11 (10,000) (10,000) 0 19.74 $66,750 $ 20.58 $68,950$ 21.31 $ 69,690$ 22.92 $68,900 $ 15,500 $ 25,200 $ 35,700 $ 5,820 $ 2,500 39,320 $9,830 $ 29,490 $ 2,500 31,990 2,500 35,566$8,892 $ 26,6752,500 $29,175 2,500 $49,277 2,500 $ 61,994 15,499 $ 46,496$ 2,500 $48,996 12 31,990 0.812 23,679 0.731 $ 28,851 0.659 $ 32,275 13 29,175 12,319 36,958 2,500 $ 39,458 14 39,458 15 48,996 4 16 $ 103,625 17 Net present value 18 $104,186 $103,625 19 NPV under 100% bonus 20 NPV under SLM 21 Using the 100% bonus depreciation will result in the highest NPV for the project. $1,551 -PV(11%,4,-500) 23 Correct option is "Increase the amount of the initial investment by $4,000" 22 Reduction in cash flows

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