We are evaluating a project that costs $823,000, has an thirteen-year life, and

Question

We are evaluating a project that costs $823,000, has an thirteen-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 121,000 units per year. Price per unit is $44, variable cost per unit is $25, and fixed costs are $832,876 per year. The tax rate is 35 percent, and we require a 16 percent return on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 17 percent.

Showing your work, what would be the best case NPV and 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 17% and Variable and fixed costs decrease by 17%

OCF = {[(44*1.17)-(25*0.83)] * 121000*1.17

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