We are evaluating a project that costs $1,675,000, has a six-year life, and has
ID: 2633653 • Letter: W
Question
We are evaluating a project that costs $1,675,000, has a six-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 91,000 units per year. Price per unit is $35.95, variable cost per unit is $21.40, and fixed costs are $775,000 per year. The tax rate is 35 percent, and we require a return of 11 percent on this project.
Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within
Explanation / Answer
Initial cost 1,675,000 Total sales = 91000X35.95 = 3,271,450 cost per unit= 21.40X91,000+775,000 = $29.91 variable cost 1947400X5 = 9,737,000 Fixed cost 775,000X5= 3,875,000 cash outflows 15,287,000 Year Cash flows PV factor@11% Present value 0 15,287,000 1 3,271,450 0.901 2947576.45 2 3,271,450 0.812 2656417.4 3 3,271,450 0.731 2391429.95 4 3,271,450 0.659 2155885.55 5 3,271,450 0.593 1939969.85 6 3,271,450 0.535 1750225.75 13841504.95 NPV 0f the project = -cash outflows+cash inflowsXtax rate NOV= -15287000+13,841,504.95X0.65 = NPV = -6,290,021.78
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