We are evaluating a project that costs $660,000, has a five-year life, and has n
ID: 2623421 • Letter: W
Question
We are evaluating a project that costs $660,000, has a five-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 69,000 units per year. Price per unit is $58, variable cost per unit is $38, and fixed costs are $660,000 per year. The tax rate is 35 percent, and we require a 12 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within
We are evaluating a project that costs $660,000, has a five-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 69,000 units per year. Price per unit is $58, variable cost per unit is $38, and fixed costs are $660,000 per year. The tax rate is 35 percent, and we require a 12 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within
Explanation / Answer
Best-case Scenario:-
Price p.u. = 58*1.1 = $63.80 p.u
Variable cost p.u. = 38*0.90 = $34.20 p.u.
Fixed cost = 660000*0.90 = $594000
Quantity = 69000*1.10 = 75900 units
..
..
Depreciation each year = 660000/5
=$132000
..
Note:- Depreciation will remain same both in best case & worst case scenarios
.
Therefore,
Annual cash inflows = [(sales p.u.
Best-case Scenario:-
Price p.u. = 58*1.1 = $63.80 p.u
Variable cost p.u. = 38*0.90 = $34.20 p.u.
Fixed cost = 660000*0.90 = $594000
Quantity = 69000*1.10 = 75900 units
..
..
Depreciation each year = 660000/5
=$132000
..
Note:- Depreciation will remain same both in best case & worst case scenarios
.
Therefore,
Annual cash inflows = [(sales p.u.
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