Question 3

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Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Fox Co.: Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: unit sales Sales price Variable cost per unit Fixed operating costs except depreciation Year 1 3,000 $17.25 $8.88 $12,500 33% Year 2 3,250 $17.33 $8.92 $13,000 year 3 3,300 $17.45 $9.03 $13,220 Year 4 3,400 $18.24 $9.06 $13,250 Accelerated depreciation rate This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Fox 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 depredation. Determine what the project's net present value (NPV) would be when using accelerated depreciation. O $18,503 O $16,447 O $24,671 O $20,559 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.