We are evaluating a project that costs $972,000, has a four-year life, and has n

Question

We are evaluating a project that costs $972,000, has a four-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 88,800 units per year. Price per unit is $35.15, variable cost per unit is $21.40, and fixed costs are $768,000 per year. The tax rate is 35 percent, and we require a return of 13 percent on this project.

Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within

Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within

Explanation / Answer

Ignoring the 10%, Cash Flow per year = 379,500. (Net after tax 294,450 plus 35% tax saved on depreciation of 243,000). That's a PV, at 13% for 4 yrs., of 1,128,812. NPV = 156,812 Positive.

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