We are evaluating a project that costs $1,140,000, has a ten-year life, and has
ID: 2639075 • Letter: W
Question
We are evaluating a project that costs $1,140,000, has a ten-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 54,000 units per year. Price per unit is $50, variable cost per unit is $20, and fixed costs are $720,000 per year. The tax rate is 35 percent, and we require a 18 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 $1,140,000, has a ten-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 54,000 units per year. Price per unit is $50, variable cost per unit is $20, and fixed costs are $720,000 per year. The tax rate is 35 percent, and we require a 18 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 NPV
Quantity=10% higher=54000*1.1= 59400
Price = 10% higher=50*1.1=55
Variable cost=10% lower=20*0.9=18
Fixed cost=10% lower=720000*0.9=648000
Year
0
1
2
3
4
5
6
7
8
9
10
Cost
-1140000
Sales(units)
59400
59400
59400
59400
59400
59400
59400
59400
59400
59400
Price per unit
55
55
55
55
55
55
55
55
55
55
Total Revenue
3267000
3267000
3267000
3267000
3267000
3267000
3267000
3267000
3267000
3267000
Variable cost per unit
18
18
18
18
18
18
18
18
18
18
Total variable cost
1069200
1069200
1069200
1069200
1069200
1069200
1069200
1069200
1069200
1069200
Fixed cost
648000
648000
648000
648000
648000
648000
648000
648000
648000
648000
Depreciation
114000
114000
114000
114000
114000
114000
114000
114000
114000
114000
PBT
1435800
1435800
1435800
1435800
1435800
1435800
1435800
1435800
1435800
1435800
Tax@35%
502530
502530
502530
502530
502530
502530
502530
502530
502530
502530
PAT
933270
933270
933270
933270
933270
933270
933270
933270
933270
933270
Cash flow=PAT+dep
1047270
1047270
1047270
1047270
1047270
1047270
1047270
1047270
1047270
1047270
P.V@18%
-1140000
887516.9
752133
637400.9
540170.2
457771.4
387941.8
328764.3
278613.8
236113.4
200096.1
NPV
3566522
Worst case NPV
Quantity=10% lower=54000*0.9= 48600
Price = 10% lower=50*0.9=45
Variable cost=10% higher=20*1.1=22
Fixed cost=10% higher=720000*1.1=792000
Year
0
1
2
3
4
5
6
7
8
9
10
Cost
-1140000
Sales(units)
48600
48600
48600
48600
48600
48600
48600
48600
48600
48600
Price per unit
45
45
45
45
45
45
45
45
45
45
Total Revenue
2187000
2187000
2187000
2187000
2187000
2187000
2187000
2187000
2187000
2187000
Variable cost per unit
22
22
22
22
22
22
22
22
22
22
Total variable cost
1069200
1069200
1069200
1069200
1069200
1069200
1069200
1069200
1069200
1069200
Fixed cost
792000
792000
792000
792000
792000
792000
792000
792000
792000
792000
Depreciation
114000
114000
114000
114000
114000
114000
114000
114000
114000
114000
PBT
211800
211800
211800
211800
211800
211800
211800
211800
211800
211800
Tax@35%
74130
74130
74130
74130
74130
74130
74130
74130
74130
74130
PAT
137670
137670
137670
137670
137670
137670
137670
137670
137670
137670
Cash flow=PAT+dep
251670
251670
251670
251670
251670
251670
251670
251670
251670
251670
P.V@18%
-1140000
213279.7
180745.5
153174.1
129808.6
110007.3
93226.51
79005.51
66953.82
56740.53
48085.19
NPV
-8973.3
Year
0
1
2
3
4
5
6
7
8
9
10
Cost
-1140000
Sales(units)
59400
59400
59400
59400
59400
59400
59400
59400
59400
59400
Price per unit
55
55
55
55
55
55
55
55
55
55
Total Revenue
3267000
3267000
3267000
3267000
3267000
3267000
3267000
3267000
3267000
3267000
Variable cost per unit
18
18
18
18
18
18
18
18
18
18
Total variable cost
1069200
1069200
1069200
1069200
1069200
1069200
1069200
1069200
1069200
1069200
Fixed cost
648000
648000
648000
648000
648000
648000
648000
648000
648000
648000
Depreciation
114000
114000
114000
114000
114000
114000
114000
114000
114000
114000
PBT
1435800
1435800
1435800
1435800
1435800
1435800
1435800
1435800
1435800
1435800
Tax@35%
502530
502530
502530
502530
502530
502530
502530
502530
502530
502530
PAT
933270
933270
933270
933270
933270
933270
933270
933270
933270
933270
Cash flow=PAT+dep
1047270
1047270
1047270
1047270
1047270
1047270
1047270
1047270
1047270
1047270
P.V@18%
-1140000
887516.9
752133
637400.9
540170.2
457771.4
387941.8
328764.3
278613.8
236113.4
200096.1
NPV
3566522
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