We are evaluating a project that costs $1,140,000, has a five-year life, and has
ID: 2634479 • Letter: W
Question
We are evaluating a project that costs $1,140,000, 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 87,300 units per year. Price per unit is $34.40, variable cost per unit is $20.65, and fixed costs are $753,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project.
Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within
Required:Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within
Explanation / Answer
The best case is at +10% and the worst case is at -10%
Outflow -140000 Income=87000*(34.40-20.65)-753000 443250 443250 443250 443250 443250 Depriciation=140000/5 28000 28000 28000 28000 28000 Income before Tax 415250 415250 415250 415250 415250 Income after tax 35%=0.65X 269912.5 269912.5 269912.5 269912.5 269912.5 Add Depriciation 297912.5 297912.5 297912.5 297912.5 297912.5 PV -140000 270829.5 246208.7 223826.1 203478.2 184980.2 989323 NPV with +10% Particular/Year 0 1 2 3 4 5 NPV Outflow -140000 Income=87000*(1.10)*(34.40*1.10-20.65*1.10)-753000*1.10 619162.5 619162.5 619162.5 619162.5 619162.5 Depriciation=140000/5 28000 28000 28000 28000 28000 Income before Tax 591162.5 591162.5 591162.5 591162.5 591162.5 Income after tax 35%=0.65X 384255.6 384255.6 384255.6 384255.6 384255.6 Add Depriciation 412255.6 412255.6 412255.6 412255.6 412255.6 PV -140000 374777.8 340707.1 309733.8 281576.1 255978.3 1422773 NPV with -10% Particular/Year 0 1 2 3 4 5 NPV Outflow -140000 Income=87000*(0.90)*(34.40*0.90-20.65*0.90)-753000*0.90 291262.5 291262.5 291262.5 291262.5 291262.5 Depriciation=140000/5 28000 28000 28000 28000 28000 Income before Tax 263262.5 263262.5 263262.5 263262.5 263262.5 Income after tax 35%=0.65X 171120.6 171120.6 171120.6 171120.6 171120.6 Add Depriciation 199120.6 199120.6 199120.6 199120.6 199120.6 PV -140000 181018.8 164562.5 149602.3 136002.1 123638.2 614824Related Questions
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