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Determining the project net present value

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Reference no: EM132341465

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:

Year 1 Year 2 Year 3 Year 4

Unit sales 3,000 3,250 3,300 3,400

Sales price$17.25 $17.33 $17.45 $18.24

Variable cost per unit$8.88 $8.92 $9.03 $9.06

Fixed operating costs$12,500 $13,000 $13,220 $13,250

This project will require an investment of $25,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project's four-year life. Fox pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be under the new tax law.

Determine what the project's net present value (NPV) would be under the new tax law.

  • $15,358
  • $17,662
  • $13,822
  • $12,286

Reference no: EM132341465

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