We are evaluating a project that costs $670,000, has a five-year life, and has n
ID: 2710703 • Letter: W
Question
We are evaluating a project that costs $670,000, has a five-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 59,000 units per year. Price per unit is $44, variable cost per unit is $24, and fixed costs are $760,000 per year. The tax rate is 35 percent, and we require a 18 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent.
Calculate the best-case and worst-case NPV figures. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Calculate the best-case and worst-case NPV figures. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
NPV $ Best Case 679593.20 Worst Case 29141.63 Calculation of Cash Flows - Normal Year 0 1 2 3 4 5 Initial Investment -670000 Operating Cash Flows 319900 319900 319900 319900 319900 Total Cash Flows -670000 319900 319900 319900 319900 319900 Required Rate of Return 18% Discount factor (1/(1+0.18)^year 1 0.84745763 0.71818443 0.608630873 0.5157889 0.4371092 Discounted Flows (Cash flow * Disc Factor) -670000 271101.695 229747.199 194701.0162 165000.86 139831.24 Net Present Value Sum of discounted flows = 330382.01 Calculation of Cash Flows - Best Case Year 0 1 2 3 4 5 Initial Investment -670000 Operating Cash Flows 431570 431570 431570 431570 431570 Total Cash Flows -670000 431570 431570 431570 431570 431570 Required Rate of Return 18% Discount factor (1/(1+0.18)^year 1 0.84745763 0.71818443 0.608630873 0.5157889 0.4371092 Discounted Flows (Cash flow * Disc Factor) -670000 365737.288 309946.854 262666.8257 222599 188643.22 Net Present Value (Best Case) Sum of discounted flows = 679593.198 Calculation of Cash Flows - Worst Case Year 0 1 2 3 4 5 Initial Investment -670000 Operating Cash Flows 223570 223570 223570 223570 223570 Total Cash Flows -670000 223570 223570 223570 223570 223570 Required Rate of Return 18% Discount factor (1/(1+0.18)^year 1 0.84745763 0.71818443 0.608630873 0.5157889 0.4371092 Discounted Flows (Cash flow * Disc Factor) -670000 189466.102 160564.493 136071.6042 115314.92 97724.507 Net Present Value (worst case) Sum of discounted flows = 29141.6252 Investment 670000 Depreciation 670000/5= 134000 Sales Units 59000 Sales Price 44 Variable Cost 24 Fixed Cost 760000 Tax Rate 35% Variance +/-10% Calculation of Cash Flows Normal Best case Worst cast Normal Normal+10% Normal-10% Sales Units 59000 64900 53100 Sales Price 44 48.4 39.6 Variable Cost 24 26.4 21.6 Total Sales 2596000 3141160 2102760 Units * price Total Variable Cost 1416000 1713360 1146960 Units * vc Fixed Costs 760000 836000 684000 Depreciation 134000 134000 134000 EBT 286000 457800 137800 sales-vc-fc-depn Tax 100100 160230 48230 ebt*0.35 EAT 185900 297570 89570 ebt-tax Operating cash flows 319900 431570 223570 eat+depn NPV $ Best Case 1621772.30 Worst Case -1092418.26 Calculation of Cash Flows - Normal Year 0 1 2 3 4 5 Initial Investment -670000 Operating Cash Flows 319900 319900 319900 319900 319900 Total Cash Flows -670000 319900 319900 319900 319900 319900 Required Rate of Return 18% Discount factor (1/(1+0.18)^year 1 0.84745763 0.71818443 0.608630873 0.5157889 0.4371092 Discounted Flows (Cash flow * Disc Factor) -670000 271101.695 229747.199 194701.0162 165000.86 139831.24 Net Present Value Sum of discounted flows = 330382.01 Calculation of Cash Flows - Best Case Year 0 1 2 3 4 5 Initial Investment -670000 Operating Cash Flows 732858 732858 732858 732858 732858 Total Cash Flows -670000 732858 732858 732858 732858 732858 Required Rate of Return 18% Discount factor (1/(1+0.18)^year 1 0.84745763 0.71818443 0.608630873 0.5157889 0.4371092 Discounted Flows (Cash flow * Disc Factor) -670000 621066.102 526327.205 446040.0041 378000 320338.99 Net Present Value (Best Case) Sum of discounted flows = 1621772.3 Calculation of Cash Flows - Worst Case Year 0 1 2 3 4 5 Initial Investment -670000 Operating Cash Flows -135080 -135080 -135080 -135080 -135080 Total Cash Flows -670000 -135080 -135080 -135080 -135080 -135080 Required Rate of Return 18% Discount factor (1/(1+0.18)^year 1 0.84745763 0.71818443 0.608630873 0.5157889 0.4371092 Discounted Flows (Cash flow * Disc Factor) -670000 -114474.58 -97012.353 -82213.85828 -69672.76 -59044.71 Net Present Value (worst case) Sum of discounted flows = -1092418.3 Investment 670000 Depreciation 670000/5= 134000 Sales Units 59000 Sales Price 44 Variable Cost 24 Fixed Cost 760000 Tax Rate 35% Variance +/-10% Calculation of Cash Flows Normal Best case Worst cast Normal Sales Units 59000 64900 53100 Sales Price 44 48.4 39.6 Variable Cost 24 21.6 26.4 Total Sales 2596000 3141160 2102760 Units * price Total Variable Cost 1416000 1401840 1401840 Units * vc Fixed Costs 760000 684000 836000 Depreciation 134000 134000 134000 EBT 286000 921320 -269080 sales-vc-fc-depn Tax 100100 322462 0 ebt*0.35 EAT 185900 598858 -269080 ebt-tax Operating cash flows 319900 732858 -135080 eat+depn
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