Celestial Crane Cosmetics 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 (units)	4,800	5,100	5,000	5,120
Sales price	$22.33	$23.45	$23.85	$24.45
Variable cost per unit	$9.45	$10.85	$11.95	$12.00
Fixed operating costs except depreciation	$32,500	$33,450	$34,950	$34,875
Accelerated depreciation rate	33%	45%	15%	7%

This project will require an investment of $25,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Celestial Crane Cosmetics pays a constant tax rate of 40%, and it has a required rate of return of 11%.

1.) When using accelerated depreciation, the project’s net present value (NPV) is ________ . 

2.) When using straight-line depreciation, the project’s NPV is _______ .

3.) Using the ____________ (straight line/accelerated) depreciation method will result in the greater NPV for the project.

4.) No other firm would take on this project if Celestial Crane Cosmetics turns it down. How much should Celestial Crane Cosmetics 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 $700 for each year of the four-year project?

a.) $2,172

b.) $1,303

c.) $1,846

d.) $1,629

5.) Celestial Crane Cosmetics spent $2,750.00 on a marketing study to estimate the number of units that it can sell each year. What should Celestial Crane Cosmetics do to take this information into account?

a.) The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost.

b.) Increase the amount of the initial investment by $2,750.00.

c.) Increase the NPV of the project $2,750.00.

Answer rating: 100% (QA)

solution 1Calculation of NPV using accelerated method sale price per unit Less variable cos... View the full answer