Companies invest in expansion projects with the expectation of increasing the earnings of its business.
Consider the case of McFann Co.:
McFann 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 except depreciation $12,500 $13,000 $13,220 $13,250
Accelerated depreciation rate 33% 45% 15% 7%
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. McFann 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 depreciation. (Note: Round your answer to the nearest whole dollar.)
a. $23,642
b. $20,558
c. $18,502
d. $16,446