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ID: 1175014 • Letter: M
Question
MindTap-Cengage Learning x tatic/nb/ui/evo/index.html?deploymentid S eC Secure https://ng Chapter 10 Assignment ???? to AttemptsKeep the Highest: 5s S. Analysis of an expansion project Companies invest in expansion prajects 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 wil have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Yeer 3 Year 4 Unit sales (urits) Sales price Variable cost per unit Fixed operating costs except depreciation $37,000 $37,500 $38,120 $39,560 Accelerated depreciation rate $38.50 $39.8 $40.15 $41.55 22.34 $22.85 $23.67 $23.87 33% 45% 15% 7% This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the praject's four-year life. Lumbering Ox Truckmakers pays a constant tax rate of 40%, and it has a recured rate of return of 11%. "(Hint When using accelerated deprociation, the praject's net present value (NPV) is Round each element in your computation-indluding the preject's net present velue-to the nearest whole dollar.) When using straight-line depreciation, the project's NPV is (Hint Again, round each element in your computation-indluding the project's net present value-to the nearest whole dolar.) Using the deprecietion method will result in the greeter NPV for the project How much should Lumbering Ox Truckmakers reduce the NPV of this project if it discovered that this praject would reduce one of its division's net after-tax cash fows by $700 for each year of the four-year praject $1,846 $2,172 $1,303 1,629 The graject wil require an initial investment of $20,000, but the project will also be using a company owned truck that is not currently being used. This truck couke be sold for $18,000, after taxes, if the project is rejected. What should Lumbering Ox Truckmakers do to take this information into account? Increase the amount of the inital isvestment by 518,000 Increase the NPy of the praject by $18,00D. The company dods not need to do anything with the value of the truck because the truck s a sunk costExplanation / Answer
NPV as per accelerated depreciation Year Cash flow before dep dep Inc before tax Inc after tax Cash flow Discount PV 0 20000 -20000 1 -20000 1 19560 6600 12960 7776 14376 0.901 12952.78 2 30620 9000 21620 12972 21972 0.812 17841.26 3 31096 3000 28096 16857.6 19857.6 0.731 14515.91 4 35580 1400 34180 20508 21908 0.659 14437.37 NPV 39747.32 NPV as per Straight line depreciation: Year Cash flow before dep dep Inc before tax Inc after tax Cash flow Discount PV 0 20000 -20000 1 -20000 1 19560 5000 14560 8736 13736 0.901 12376.14 2 30620 5000 25620 15372 20372 0.812 16542.06 3 31096 5000 26096 15657.6 20657.6 0.731 15100.71 4 35580 5000 30580 18348 23348 0.659 15386.33 NPV 39405.24 Under Accelerated depreciation: NPV = 39747.32 Under Straight Line depreciation: NPV = 39405.24 Using the Accelerated depreciation method will result in the greater NPV for the project. Reduction of After tax net cash flow by $700 every year: Year Cash flow before dep dep Inc before tax Inc after tax Cash flow Discount PV 0 20000 -20000 1 -20000 1 19560 6600 12960 7776 13676 0.901 12322.08 2 30620 9000 21620 12972 21272 0.812 17272.86 3 31096 3000 28096 16857.6 19157.6 0.731 14004.21 4 35580 1400 34180 20508 21208 0.659 13976.07 NPV 37575.22 Reduction in NPV = 39747.32 - 37575.22 = 2172.10 SO ANSWER IS $2172 ANSWER : The company does not need to do anything with the value of the truck because the truck is a sunk cost. As per company is not using the truck currently, so it is a sunk cost for the company.