We are evaluating a project that costs $924,000, has an eight-year life, and has

Question

We are evaluating a project that costs $924,000, has an eight-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 75,000 units per year. Price per unit is $46, variable cost per unit is $31, and fixed costs are $825,000 per year. The tax rate is 35 percent, and we require a 15 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within

Explanation / Answer

To get the best case of NPV, use +10%
P=39+0.1*39=$42.9
Q=75,000+0.1*75000=82500 units
VC=23+0.1*23=$25.3
FC=850,000+0.1*850,000=S935,000
OCF=(sales-costs)(1-T)+D*T
OCF =(82,500*42.9-25.3*82,500-935,000)(1-0.35)+0.35*90,500
OCF=$367,725
PVIFA15%,8years=[1-(1+0.15)-8]/0.15=4.4873
NPV=-724,000+367,725*PVIFA15%,8years

NPV=$926,100.30

To get the Worst case of NPV, use -10%

P=39-0.1*39=$35.1
Q=75,000-0.1*75000=67,500 units
VC=23-0.1*23=$20.7
FC=850,000-0.1*850,000=S765,000
OCF=(sales-costs)(1-T)+D*T
OCF =(67,500*35.1-20.7*67,500-765,000)(1-0.35)+0.35*90,500
OCF=$166,225

PVIFA15%,8years=[1-(1+0.15)-8]/0.15=4.4873

NPV=-724,000+166,225*PVIFA15%,8years

NPV=$21,905.02

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.