6 . Analysis of an expansion projectCompanies invest in expansion projects with the expectation of increasing the
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Analysis of an expansion projectCompanies invest in expansion projects with the expectation of increasing the earnings of its business.Consider the case of Falcon Freight:Falcon Freight is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year Year Year Year Unit sales unitsSales price$$$$Variable cost per unit$$$$Fixed operating costs except depreciation$$$$Accelerated depreciation rateThis project will require an investment of $ in new equipment. The equipment will have no salvage value at the end of the projects fouryear life. Falcon Freight pays a constant tax rate of and it has a required rate of return of When using accelerated depreciation, the projects net present value NPV is Hint: Round each element in your computationincluding the projects net present valueto the nearest whole dollar.When using straightline depreciation, the projects NPV is Hint: Again, round each element in your computationincluding the projects net present valueto the nearest whole dollar.Using the depreciation method will result in the greater NPV for the project.No other firm would take on this project if Falcon Freight turns it down. How much should Falcon Freight reduce the NPV of this project if it discovered that this project would reduce one of its divisions net aftertax cash flows by $ for each year of the fouryear project?$$$$The project will require an initial investment of $ but the project will also be using a companyowned truck that is not currently being used. This truck could be sold for $ after taxes, if the project is rejected. What should Falcon Freight do to take this information into account?The company does not need to do anything with the value of the truck because the truck is a sunk cost.Increase the amount of the initial investment by $Increase the NPV of the project by $
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