Companies invest in expansion projects with the expectation of increasing the earnings of its business....
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Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Yeatman Co.: Yeatman 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 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 33% Accelerated depreciation rate 45% 15% 7% This project will require an investment of $20,000 in new Determine what the project's net present value (NPV) equipment. The equipment will have no salvage value a would be when using accelerated depreciation. the end of the project's four-year life. Yeatman pays a o $39,581 constant tax rate of 40%, and it has a weighted average $45,518 cost of capital (WACC) of 11%. Determine what the O $47,497 project's net present value (NPV) would be when using $35,623 accelerated depreciation. Now determine what the project's NPV would be when using straight-line depreciation. $45,125 $51,011 $45,125 $39,239 Using the accelerated depreciation method will result in the highest NPV for the p $37,277
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