value: 1.38 points We are evaluating a project that costs $719,000, has an nine-
ID: 2618033 • Letter: V
Question
value: 1.38 points We are evaluating a project that costs $719,000, has an nine-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 127,000 units per year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $727 628 per year. The tax rate is 30 percent, and we require a 21 percent return on this project. The projections given for price, quantity variable costs, and fixed costs are all accurate to within +/- 15 percent Required: (a) Calculate the best-case NPV (Do not round your intermediate calculations.) Click to select) (b) Calculate the worst-case NPV. (Do not round your intermediate calculations.) (Click to select) References eBook & Resources Worksheet Learning Objective: 11-02 How to perfon scenario analysis for a proposed investmExplanation / Answer
Cost of Project = $719,000
Life of Project = 9 years
Annual Depreciation = Cost of Project / Life of Project
Annual Depreciation = $719,000 / 9
Annual Depreciation = $79,888.89
Answer a.
Annual OCF = [(Price per unit - Variable Cost per unit) * Sales Volume - Fixed Costs] * (1 - tax) + tax * Depreciation
Annual OCF = [($46.00 - $21.25) * 146,050 - $618,483.80] * (1 - 0.30) + 0.30 * $79,888.89
Annual OCF = $2,996,253.70 * 0.70 + 0.30 * $79,888.89
Annual OCF = $2,121,344.26
NPV = -$719,000 + $2,121,344.26 * PVA of $1 (21%, 9)
NPV = -$719,000 + $2,121,344.26 * 3.9054
NPV = $7,565,697.87
Answer b.
Annual OCF = [(Price per unit - Variable Cost per unit) * Sales Volume - Fixed Costs] * (1 - tax) + tax * Depreciation
Annual OCF = [($34.00 - $28.75) * 107,950 - $836,772.20] * (1 - 0.30) + 0.30 * $79,888.89
Annual OCF = -$270,034.70 * 0.70 + 0.30 * $79,888.89
Annual OCF = -$165,057.62
NPV = -$719,000 - $165,057.62 * PVA of $1 (21%, 9)
NPV = -$719,000 - $165,057.62 * 3.9054
NPV = -$1,363,616.03
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