Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year
Posted: Thu Apr 28, 2022 1:44 pm
Fox 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
a) This project will require an investment of $25,000 in new
equipment. Under the new tax law, the equipment is eligible for
100% bonus deprecation at t = 0, so it will be fully depreciated at
the time of purchase. The equipment will have no salvage value at
the end of the project’s four-year life. Fox pays a constant tax
rate of 25%, and it has a weighted average cost of capital (WACC)
of 11%. Determine what the project’s net present value (NPV) would
be under the new tax law.
Determine what the project’s net present value (NPV) would be
under the new tax law.
$47,736
$38,189
$57,283
$54,896
b) Now determine what the project’s NPV would be when using
straight-line depreciation.
c) Using the ____ depreciation method will result in the
highest NPV for the project.
bonus
straightline
d) 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 $400 for each year of the four-year
project?
$1,241
$1,055
$1,365
$745
e) Fox spent $2,750 on a marketing study to estimate the number
of units that it can sell each year. What should Fox do to take
this information into account?
Increase the NPV of the project $2,750.
The company does not need to do anything with the cost of the
marketing study because the marketing study is a sunk cost.
Increase the amount of the initial investment by $2,750.
following sales, variable costs, and fixed operating costs:
Year 1
Year 2
Year 3
Year 4
a) This project will require an investment of $25,000 in new
equipment. Under the new tax law, the equipment is eligible for
100% bonus deprecation at t = 0, so it will be fully depreciated at
the time of purchase. The equipment will have no salvage value at
the end of the project’s four-year life. Fox pays a constant tax
rate of 25%, and it has a weighted average cost of capital (WACC)
of 11%. Determine what the project’s net present value (NPV) would
be under the new tax law.
Determine what the project’s net present value (NPV) would be
under the new tax law.
$47,736
$38,189
$57,283
$54,896
b) Now determine what the project’s NPV would be when using
straight-line depreciation.
c) Using the ____ depreciation method will result in the
highest NPV for the project.
bonus
straightline
d) 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 $400 for each year of the four-year
project?
$1,241
$1,055
$1,365
$745
e) Fox spent $2,750 on a marketing study to estimate the number
of units that it can sell each year. What should Fox do to take
this information into account?
Increase the NPV of the project $2,750.
The company does not need to do anything with the cost of the
marketing study because the marketing study is a sunk cost.
Increase the amount of the initial investment by $2,750.