We are evaluating a project that costs $857,000, has a 7-year life, and has no s
ID: 2645920 • Letter: W
Question
We are evaluating a project that costs $857,000, 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 82,000 units per year. Price per unit is $40, variable cost per unit is $21, and fixed costs are $868,141 per year. The tax rate is 38 percent, and we require a 19 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-16 percent.
Required:
Calculate the best-case and worst-case NPV figures. (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))
We are evaluating a project that costs $857,000, 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 82,000 units per year. Price per unit is $40, variable cost per unit is $21, and fixed costs are $868,141 per year. The tax rate is 38 percent, and we require a 19 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-16 percent.
Explanation / Answer
in best case the sales units= 82,000*1.16= 95,120 units and revenue= $46.4.
total revenue= 95,120*46.4=$4,413,568
total costs= 95,120*24.36=$2,317,123
total fixed cost = $1,007,043 and depreciation is $122,428
tota cost= 3,446,594
total NPV= $4,413,568- $3,446,594= $966,974
in the worst case, the values are
sales units are= 82,000*0.84= 68,880, selling price per unit $33.6 and total revenue= 68,880*33.6= $2,314,368
total cost= 68,880*17.64= $1,215,043, total fixed cost $729,238
depreciation is 122,428
total NPV= $2,314,368- (2,066,709)
=$247,659
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