We are evaluating a project that costs $1,374,000, has a six-year life, and has

Question

We are evaluating a project that costs $1,374,000, has a six-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 87,400 units per year. Price per unit is $34.45, variable cost per unit is $20.70, and fixed costs are $754,000 per year. The tax rate is 30 percent, and we require a return of 11 percent on this project. Required: 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. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).) NPV

Best-case $

Worst-case $

Explanation / Answer

The NPV are:

Worst Case (-) $ 210,169.31

Best Case (+) $ 766,895.52

The calculations are shown in the table below:

NORMAL BEST WORST Sales Quantity (Units) 87400 96140 78660 Sale Price per Unit ($) 34.45 37.90 31.01 Variable Cost per Unit ($) 20.70 22.77 18.63 Sales Revenue ($) 3010930 3643225.3 2438853.3 Cost of Production Variable Cost ($) 1809180.00 2189107.80 1465435.80 Fixed Cost ($) 754000.00 829400.00 678600.00 Depreciation (St Line) (1374000/6) 229000.00 229000.00 229000.00 Total Cost of Production 2792180.00 3247507.80 2373035.80 Profit before tax 218750.00 395717.50 65817.50 Tax @ 30% 65625.00 118715.25 19745.25 Profit after tax 153125.00 277002.25 46072.25 Add Depn 229000.00 229000.00 229000.00 Cash flow per year 382125.00 506002.25 275072.25 PVIFA(11,6) 4.231 4.231 4.231 PV of Annual Cash Flows 1616770.88 2140895.52 1163830.69 Less: Initial Outlay 1374000.00 1374000.00 1374000.00 NPV ($) 242770.88 766895.52 -210169.31

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