We are evaluating a project that costs $873,000, has a 7-year life, and has no s
ID: 2645283 • Letter: W
Question
We are evaluating a project that costs $873,000, has a 7-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 113,000 units per year. Price per unit is $36, variable cost per unit is $28, and fixed costs are $879,984 per year. The tax rate is 31 percent, and we require a 20 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-13 percent.
The question is give the Best case and the worst case?
Explanation / Answer
Best case
Sales Quantity = 113000*(1+13%) = 127690
Price = 36 *(1+13%) = 40.68
variable cost per unit = 28*(1-13%) = 24.36
Fixed costs = 879984*(1-13%) = $ 765,586.08
Annual Depreciation = 873000/7
Annual Cash flow = (127690*(40.68-24.36) - 765586.08)*(1-31%) + 873000/7 *31%
Annual Cash flow = $ 948,298.59
NPV = -873000 + 948298.59*PVIFA(20%,7)
NPV = -873000 + 948298.59*3.6046
NPV = $ 2,545,237.10
Worst case
Sales Quantity = 113000*(1+13%) = 127690
Price = 36 *(1-13%) = 31.32
variable cost per unit = 28*(1+13%) = 31.64
Fixed costs = 879984*(1+13%) = $ 994,381.92
Annual Depreciation = 873000/7
Annual Cash flow = (127690*(31.32-31.64) - 994381.92)*(1-31%) + 873000/7 *31%
Annual Cash flow = - $ 675,656.05
NPV = -873000 - 675,656.05*PVIFA(20%,7)
NPV = -873000 - 675,656.05*3.6046
NPV = - $ 3,308,469.80
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.