**Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed…**

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## Question “Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed…”

Yeatman 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 4,800 5,100 5,000 5,120 $22.33 $23.45 $23.85 $24.45 $9.45$10.85 $11.95 $12.00 Fixed operating costs except depreciation $32,500 $33,450 $34,950 $34,875 7010 Unit sales Sales price Variable cost per unit Accelerated depreciation rate 33% 45% 15%

This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Yeatman 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 $35,623 O $39,58:1 O $47,497 O $31,665 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 Yeatman turns it down. How much should Yeatman 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 $500 for each year of the four-year project? O $1,318 O $1,551 O $1,706 $1,163

## Answer

Req 1. | |||||||||

Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |||||

Units Sales | 4800 | 5100 | 5000 | 5120 | |||||

Selling price per unit | 22.33 | 23.45 | 23.85 | 24.45 | |||||

Variable ccost per unit | 9.45 | 10.85 | 11.95 | 12 | |||||

CM per unit | 12.88 | 12.6 | 11.9 | 12.45 | |||||

Total Contribution (Unit sales * CM per unit) | 61824 | 64260 | 59500 | 63744 | |||||

Less: Fixed cost | |||||||||

Depreciation | 6600 | 9000 | 3000 | 1400 | |||||

Other fixed cost | 32500 | 33450 | 34950 | 34875 | |||||

Net Income before tax | 22724 | 21810 | 21550 | 27469 | |||||

Less: Tax @ 40% | 9089.6 | 8724 | 8620 | 10987.6 | |||||

After tax income | 13634.4 | 13086 | 12930 | 16481.4 | |||||

Add: Depreciation | 6600 | 9000 | 3000 | 1400 | |||||

Annual cashflows | 20234.4 | 22086 | 15930 | 17881.4 | |||||

Initial Investment | -20000 | ||||||||

Cashflows of the year | -20000 | 20234.4 | 22086 | 15930 | 17881.4 | ||||

PVF at 11% | 1 | 0.900901 | 0.811622 | 0.731191 | 0.658731 | ||||

Present value of cashflows | -20000 | 18229.19 | 17925.49 | 11647.88 | 11779.03 | ||||

NPV | 39581.6 | ||||||||

Answer is $ 39581 | |||||||||

Req 2. | |||||||||

NPV with SLM | |||||||||

Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |||||

Units Sales | 4800 | 5100 | 5000 | 5120 | |||||

Selling price per unit | 22.33 | 23.45 | 23.85 | 24.45 | |||||

Variable ccost per unit | 9.45 | 10.85 | 11.95 | 12 | |||||

CM per unit | 12.88 | 12.6 | 11.9 | 12.45 | |||||

Total Contribution (Unit sales * CM per unit) | 61824 | 64260 | 59500 | 63744 | |||||

Less: Fixed cost | |||||||||

Depreciation | (20000/4) | 5000 | 5000 | 5000 | 5000 | ||||

Other fixed cost | 32500 | 33450 | 34950 | 34875 | |||||

Net Income before tax | 24324 | 25810 | 19550 | 23869 | |||||

Less: Tax @ 40% | 9729.6 | 10324 | 7820 | 9547.6 | |||||

After tax income | 14594.4 | 15486 | 11730 | 14321.4 | |||||

Add: Depreciation | 5000 | 5000 | 5000 | 5000 | |||||

Annual cashflows | 19594.4 | 20486 | 16730 | 19321.4 | |||||

Initial Investment | -20000 | ||||||||

Cashflows of the year | -20000 | 19594.4 | 20486 | 16730 | 19321.4 | ||||

PVF at 11% | 1 | 0.900901 | 0.811622 | 0.731191 | 0.658731 | ||||

Present value of cashflows | -20000 | 17652.61 | 16626.9 | 12232.83 | 12727.6 | ||||

NPV | 39240 | ||||||||

Answer is $ 39240 | |||||||||

Using Accelerated method will result in highest NPV for the project. | |||||||||

Req : | |||||||||

Reduction in Cashflows for 4 years by | 500 | ||||||||

Annuity PVF at 11% fr 4 yrs | 3.10245 | ||||||||

Reduction in NPV | 1551.225 | ||||||||

Answer is $ 1551 | |||||||||

## Conclusion

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