Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Blue Llama Mining: Blue Llama Mining 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) 3,500 4,000 4,200 4,250 Sales price $38.50 $39.88 $40.15 $41.55 Variable cost per unit $22.34 $22.85 $23.67 $23.87 Fixed operating costs except depreciation $37,000 $37,500 $38,120 $39,560           Accelerated depreciation rate 33% 45% 15% 7%   This project will require an investment of $25,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Blue Llama Mining pays a constant tax rate of 40%, and it has a required rate of return of 11%. When using accelerated depreciation, the project’s net present value (NPV) is$____________(Either 29,098 32,735 36,372 or 41,828). (Hint: Round each element in your computation—including the project’s net present value—to the nearest whole dollar.)   When using straight-line depreciation, the project’s NPV is$_________(Either 35,945 44,931 34,148 or 41,337) . (Hint: Again, round each element in your computation—including the project’s net present value—to the nearest whole dollar.)   True or False: Using the accelerated depreciation method will result in the greater NPV for the project.___________

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 Sales (units) 5,500 5,200 5,700 5,820 Sales price $42.57 $43.55 $44.76 $46.79 Variable cost per unit Fixed costs, excluding depreciation Accelerated depreciation rate $22.83 $22.97 $23.45 $66,750 $68,950 $69,690 33% 45% 15% $23.87 $68,900 7% This project will require an investment of $20,000 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%. When using accelerated depreciation, the project's net present value (NPV) is When using straight-line depreciation, the project's NPV is Using the depreciation method will result in the greater NPV for the project. No other firm would take on this project if Celestial Crane Cosmetics turns it down. How much should Celestial Crane…

Unequal lives-ANPV approach Portland Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency. The firm plans to use a 13.1% cost of capital to evaluate these equal-risk projects. The initial investment and annual cash inflows over the life of each project are shown in the following table. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Initial investment (CF) Year (t) 1 2345678 u. VUIMMU BIV TRE Project X $78,000 $16,700 25,100 33,000 40,800 PETIT. Project X Project Z Project Y Project Y $52,000 Cash inflows (CF) $27,800 38,200 a. Calculate the NPV for each project over its life. Rank the projects in descending order on the basis of NPV. b. Use the annualized net present value (ANPV) approach to evaluate and rank the projects in descending order on the basis of ANPV c. Compare and contrast your findings in parts (a) and (b). Which project would you recommend that the firm…

Differential Analysis Involving Opportunity Costs On July 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $150,400 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $150,400 Life of store equipment 16 years Estimated residual value of store equipment $18,900 Yearly costs to operate the warehouse, excluding depreciation of equipment     depreciation of store equipment $56,200 Yearly expected revenues—years 1-8 74,600 Yearly expected revenues—years 9-16 70,500 Required: 1.  Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". For those boxes…

Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $50,000 2 35,000 3 30,000 4 20,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $60,000 in plant and equipment. a. What is the initial investment in the product? Remember working capital. b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. c. If the opportunity cost of capital is 10%, what is the project's NPV? d. What is the project IRR?

given information Description Amount Sales $6,000,000 Net Operating Income $800,000 Average Operating Assets $10.000,000 A new project is available that is estimated to generate an additional $500,000 in sales with an additional $60,000 in income. The project would require an investment in additional equipment of $600,000. Using the original information (in the table) and this new project's information, what would the segment's new ROI be if the project is pursued? Profit Margin Asset Turnover ROI Based on the new ROI, would the company want to pursue the new project

Differential Analysis Involving Opportunity Costs On July 1, Coastal Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $148,600 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $148,600 Life of store equipment 16 years Estimated residual value of store equipment $18,300 Yearly costs to operate the warehouse, excluding depreciation of equipment $55,900 Yearly expected revenues—years 1-8 75,300 Yearly expected revenues—years 9-16 69,800 Required: 1.  Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.…

Differential Analysis Involving Opportunity Costs On October 1, Matrix Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $149,100 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $149,100 Life of store equipment 16 years Estimated residual value of store equipment $17,900 Yearly costs to operate the store, excluding     depreciation of store equipment $56,100 Yearly expected revenues—years 1-8 $74,800 Yearly expected revenues—years 9-16 $71,000 Required: 1.  Prepare a differential analysis as of October 1 to determine whether to Operate Retail Store (Alternative 1) or Invest in Bonds (Alternative 2). If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.…