Question
Need some help on this problem, not sure how to do it at all!
We are evaluating a project that costs $1,582,000, has a seven-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 87,100 units per year. Price per unit is $34.30, variable cost per unit is $20.55, and fixed costs are $751,000 per year. The tax rate is 30 percent, and we require a return of 12 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within
Explanation / Answer
This is for worst case:
Income statement 0 1 2 3 4 5 6 7 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 0 Investment 1582000 1 Number of units sold 87,100 87,100 87,100 87,100 87,100 87,100 87,100 1.1 Worst number of units sold 1x"0.9" 78,390 78,390 78,390 78,390 78,390 78,390 78,390 2 Price per unit 34.3 34.3 34.3 34.3 34.3 34.3 34.3 2.1 Worst price 2x"0.9" 30.87 30.87 30.87 30.87 30.87 30.87 30.87 3 Worst Revenues 1.1x2.1 2419899.3 2419899.3 2419899.3 2419899.3 2419899.3 2419899.3 2419899.3
4 Var cost per unit 20.55 20.55 20.55 20.55 20.55 20.55 20.55 4.1 Worst var cost 4x"1.1" 22.605 22.605 22.605 22.605 22.605 22.605 22.605 5 Worst Variable cost 1.1x4.1 1772006 1772006 1772006 1772006 1772006 1772006 1772006 6 Fixed costs 751000 751000 751000 751000 751000 751000 751000 6.1 Worst fixed costs 6x"1.1" 826100 826100 826100 826100 826100 826100 826100 7 Operating income 3-5-6.1 -178206.65 -178206.65 -178206.65 -178206.65 -178206.65 -178206.65 -178206.65 8 Depreciation 0/"7" 226000 226000 226000 226000 226000 226000 226000 9 Taxable income 7-8 -404206.65 -404206.65 -404206.65 -404206.65 -404206.65 -404206.65 -404206.65 10 Tax 9 x 30% -121262 -121262 -121262 -121262 -121262 -121262 -121262 11 Net Income 9-10 -1582000 -282945 -282945 -282945 -282945 -282945 -282945 -282945 12 Cash flow 11+8 -1582000 -56945 -56945 -56945 -56945 -56945 -56945 -56945 Worst NPV @ 12% -1841881.5
