
Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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Transcribed Image Text:Garida Co. is considering an investment that will have the following sales, variable costs,
and fixed operating costs:
Unit sales
Sales price
Year 1
3,500
$38.50
Year 2
4,000
$39.88
Year 3
4,200
Year 4
4,250
$40.15 $41.55
$22.34 $22.85
$23.67 $23.87
Variable cost per unit
Fixed operating costs $37,000 $37,500 $38,120 $39,560
This project will require an investment of $10,000 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. Garida 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.
Which of the following most closely approximates what the project's net present value (NPV) would
be under the new tax law? (Hint: Round your final answer to two decimal places and choose the
value that most closely matches your answer.)
$58,986.21
$67,834.14
$70,783.45
$47,188.97
Which of the of the following most closely approximates what the project's NPV would be when
using straight-line depreciation? (Hint: Round your final answer to two decimal places and choose
the value that most closely matches your answer.)
$73,031.55
$58,425.24
$67,189.03
$55,503.98
Using the
depreciation method will result in the highest NPV for the project.
No other firm would take on this project if Garida turns it down. Which of the following most
closely approximates how much Garida should reduce the NPV of this project, assuming it is
discovered that this project would reduce one of its division's net after-tax cash flows by $300 for
each year of the four-year project? (Hint: Round your final answer to two decimal places and
choose the value that most closely matches your answer.)
$558.44
$791.12
$930.73
$1,023.80
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