Fox Co. is considefined theg an investment that will have the following sales, v

Question

Fox Co. is considefined theg 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 equipment. The equipment will have no salvage value at the end of the project's four-year life. Fox 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. Determine what the project's net present value (NPV) would be when using accelerated depreciation. 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 Fox turns it down. How much should Fox 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? $698 $559 $1,024 $931 The project will require an initial investment of $15,000, but the project will also be using a company-owned truck that is not currently being used. This truck could be sold for $14,000, after taxes, if the project is rejected. What should Fox do to take this information into account? Increase the NPV of the project by $14,000. Increase the amount of the initial investment by $14,000. The company does not need to do anything with the value of the truck because the truck is a sunk cost.

Explanation / Answer

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Accelerated depreciation will always give a higher NPV than straight-line depreciation because accelerated depreciation generates higher cash flows in the earlier years of the project

Using the truck in this project represents an opportunity cost to the company hence

Increase the intial investment by $14000

Year 0 Year 1 Year 2 Year 3 Year 4 No units sold 3000 3250 3300 3400 Sales Price 17.25 17.33 17.45 18.24 Revenue 51750 56322.5 57585 62016 Variable cost 26640 28990 29799 30804 Fixed cost 12500 13000 13220 13250 Depreciation 4950 6750 2250 1050 Profit Before tax 7660 7582.5 12316 16912 Tax 3064 3033 4926.4 6764.8 PAT 4596 4549.5 7389.6 10147.2 Depreciation 4950 6750 2250 1050 Net Cash Flow 9546 11300 9640 11197 Intial investment -15000 PV factor 1 0.9009 0.8116 0.7312 0.6587 -15000 8600 9171 7049 7375 NPV 17196.00

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