Garida Co. is considering an investment that will have the following sales, vari
ID: 2712459 • Letter: G
Question
Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: This project will require an investment of $15,000 in new Determine what the project's net present value (NPV) equipment. The equipment will have no salvage value at would be when using accelerated depreciation. the end of the project's four-year life. Garida pays a $17,196 constant tax rate of 40%, and it has a weighted average $15,476 cost of capital (WACC) of 11%. Determine what the $13,757 project's net present value (NPV) would be when using accelerated depreciation. $20,635 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. 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 $300 for each year of the four-year project?Explanation / Answer
A) NPV using accelerated depreciation
NPV = -Year 0 Cash Flow + Year 1 Cash Flow/(1+WACC) + Year 2 Cash Flow/(1+WACC) ^2 + Year 3 Cash Flow/(1+WACC) ^3 + Year 4 Cash Flow/(1+WACC) ^4
NPV = -15000 + 9546/(1+11%) + 11300/(1+11%)^2 + 9640/(1+11%)^3 + 11197/(1+11%)^4
NPV = 17,196
b) NPV using straight line depreciation
NPV = -Year 0 Cash Flow + Year 1 Cash Flow/(1+WACC) + Year 2 Cash Flow/(1+WACC) ^2 + Year 3 Cash Flow/(1+WACC) ^3 + Year 4 Cash Flow/(1+WACC) ^4
NPV = -15000 + 9066/(1+11%) + 10100/(1+11%)^2 + 10240/(1+11%)^3 + 12277/(1+11%)^4
NPV = 16,940
C) Using Accelerated Depreciation Method will result in the highest NPV of the project
d) NPV would be reduced = 300*(1-(1+11%)^-4)/11%
NPV would be reduced = $ 931
Working Year 0 Year1 Year2 Year3 Year4 Unit Sales [a] 3000 3250 3300 3400 Sale Price [b] 17.25 17.33 17.45 18.24 Variable Cost per Unit [c] 8.88 8.92 9.03 9.06 Fixed Operating Cost except depreciation [d] 12500 13000 13220 13250 Accelerated Depreciation Rate [e] 33% 45% 15% 7% Initial Investment [f] 15000 Annual Depreciation [g= d*15000] 4,950 6,750 2,250 1,050 Net Income before tax [h = (b-c)*a -d-e 7,660 7,583 12,316 16,912 Tax Expenses [i= h*40%] 3,064 3,033 4,926 6,765 Net Income [j = h-i] 4,596 4,550 7,390 10,147 Annual Cash Flow [k = g+j] -15000 9,546 11,300 9,640 11,197Related Questions
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