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 Unit sales 3,500 4,000 4,200 4,250 Sales price $38.50 $39.88 $40.15 $41.55 Variable cost per unit $22.34 $22.85 $23.67 $23.87 Fixed operating costs except depreciation $37,000 $37,500 $38,120 $39,560 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $10,000 in new Determine what the project's net present value (NPV) equipment. The equipment will have no salvage value at would be when using accelerated depreciation. the end of the project's four-year life. Fox pays a O $37,170 O $46,463 O $55,756 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 $41,817 accelerated depreciation. 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 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 $600 for each year of the four-year project? O $1,861 $1,396 O $2,047 O $1,582
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 Unit sales 3,500 4,000 4,200 4,250 Sales price $38.50 $39.88 $40.15 $41.55 Variable cost per unit $22.34 $22.85 $23.67 $23.87 Fixed operating costs except depreciation $37,000 $37,500 $38,120 $39,560 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $10,000 in new Determine what the project's net present value (NPV) equipment. The equipment will have no salvage value at would be when using accelerated depreciation. the end of the project's four-year life. Fox pays a O $37,170 O $46,463 O $55,756 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 $41,817 accelerated depreciation. 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 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 $600 for each year of the four-year project? O $1,861 $1,396 O $2,047 O $1,582
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 2E: Average rate of returncost savings Maui Fabricators Inc. is considering an investment in equipment...
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Transcribed Image Text: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
Unit sales
3,500
4,000
4,200
4,250
Sales price
$38.50
$39.88
$40.15
$41.55
Variable cost per unit
$22.34
$22.85
$23.67
$23.87
Fixed operating costs except depreciation
$37,000
$37,500
$38,120
$39,560
Accelerated depreciation rate
33%
45%
15%
7%
This project will require an investment of $10,000 in new
Determine what the project's net present value (NPV)
equipment. The equipment will have no salvage value at
would be when using accelerated depreciation.
the end of the project's four-year life. Fox pays a
$37,170
constant tax rate of 40%, and it has a weighted average
$46,463
cost of capital (WACC) of 11%. Determine what the
$55,756
project's net present value (NPV) would be when using
$41,817
accelerated depreciation.
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 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 $600 for each year of the four-year project?
$1,861
$1,396
$2,047
$1,582
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