Companies invest in expansion projects with the expectation of increasing the earnings of its business Consider thecase of Yeatman Co.: Yeatman 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 5,820 $42.57 $43.55 $44.76 $46.79 $22.83 $22.97 $23.45 $23.87 Fixed operating costs except depreciation $66,750 $68,950 $69,690 $68,900 7010 5,500 5,200 5,700 Unit sales Sales price Variable cost per unit Accelerated depreciation rate 3390 45% 15% This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Yeatman pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be when using accelerated depreciation
a. $74,360
b. $82,622
c. $99,146
d. $66,098
Now determine what the project's NPV would be when using straight-line depreciation. $78,328 $94,819 $103,064 Using the depreciation method will result in the highest NPV for the pr $82,451 No other firm would take on this project if Yeatman turns it down. How much should Yeatman 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?
a. $2,389
b. $1,846
c. $2,172
d. $1,629
The project will require an initial investment of $10,000, but the project will also be using a company-owned truck that is not currently being used. This truck could be sold for $18,000, after taxes, if the project is rejected. What should Yeatman do to take this information into account?
A. The company does not need to do anything with the value of the truck because the truck is a sunk cost.
B. Increase the amount of the initial investment by $18,000
C. Increase the NPV of the project by $18,000