Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the earnings of its business, Consider the case of McFann Co.: McFann Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 2 Unit sales Year 1 4,200 Year 4 4,400 $29.82 4,100 $30.00 Sales price Variable cost per unit Fixed operating costs Year 3 4,300 $30.31 $14.02 $41,890 $12.15 $13.45 $33.19 $14.55 $41,000 $41,670 $40,100 This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully deprecated at the time of purchase. The equipment will have no salvage value at the end of the project’s four-year life. McFann 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. $56,954 $63,282 $75,938 $50,626
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