Recently,DB Miller & Co.implemented a positive NPV project.The project has a projected life of 4 years and an estimated rate of return of 14 percent.The project can be expanded by simply incurring additional variable costs or shut down without incurring any penalties or additional costs.Today,the government ruled that projects of this type are now subject to a new per unit tax,the total cost of which will exceed the projected NPV.The most logical move for the company would be to

Question

Quizplus · Accepted Answer

Since the total cost of the new tax will exceed the projected NPV, it no longer makes financial sense for DB Miller & Co. to continue with the project. They should immediately end the project unless they are able to pass on the additional tax cost to their customers. This would allow them to maintain the positive NPV and continue with the project, but only if they can do so without negatively impacting their competitiveness in the market. Suspend, doubling the project size or decreasing the required return would not address the issue of the additional tax cost and could potentially lead to even greater financial losses for the company.