McFann Co. is considering an investment that will have the following sales, vari
ID: 2798164 • Letter: M
Question
McFann 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 4,200 4,250 $38.50 $39.88 $40.15 $41.55 $22.34$22.85 $23.67 $23.87 Fixed operating costs except depreciation $37,000 $37,500 $38,120 $39,560 7% 4,000 Unit sales Sales price Variable cost per unit 3,500 Accelerated depreciation rate 33% 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. McFann 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 O $46,463 $37,170 $55,756 $41,817 Now determine what the project's NPV would be when using straight-line depreciation.Explanation / Answer
Step 1) Initial investment : $10,000
Step 2) Depreciation
Step 3) Statement showing NPV
Thus NPV = 46463
NPV using Straight line depreciation
Thus using accelerated depreciation method NPV will be higher
If this project will reduce cash flow after tax of 300$ for 4 year the NPV should be reduce by $931
Marketing study is sunk cost hence no treatement should be done
Year Opening balance Depreciation rate Depreciation Closing balance 1 10000 33% 3300 6700 2 6700 45% 4500 2200 3 2200 15% 1500 700 4 700 7% 700 0