We are evaluating a project that costs $801,000, has a fifteen-year life, and ha

Question

We are evaluating a project that costs $801,000, has a fifteen-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 106,000 units per year. Price per unit is $42, variable cost per unit is $29, and fixed costs are $802,602 per year. The tax rate is 34 percent, and we require a 20 percent return on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 19 percent. (Do not round your intermediate calculations.)

(a) Calculate the best-case NPV

(b) Calculate the worst-case NPV

Explanation / Answer

Here we will use tax shield approach to calculate operating cash fows OCF in both the case.

a. Best Case : Price and quantity increase by 19% and Variable and fixed costs decrease by 19%

OCF = {[(42*1.19)-(29*0.81)] * 106000*1.19

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