Finefodder’s analysts have come up with the following revised estimates for the

Question

Finefodder’s analysts have come up with the following revised estimates for the Gravenstein store: Range Pessimistic Expected Optimistic

Investment $ 4,680,000 $ 3,000,000 $ 2,800,000

Sales 13,000,000 14,000,000 16,000,000

Variable costs as % of sales 78 76 74

Fixed cost $ 2,400,000 $ 2,200,000 $ 1,900,000

Assume the project life is 12 years, the tax rate is 40%, the discount rate is 8%, and the depreciation method is straight-line over the project's life. Conduct a sensitivity analysis for each variable and range and compute the NPV for each. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not in millions.)

NPV of Gravenstein Store Pessimistic Expected Optimistic

Investment $ $ $ Sales $ $ $

Variable costs as % of

sales $ $ $

Fixed cost $ $ $

Explanation / Answer

Pessimistic Expected Optimistic Investment $    4,680,000.00 $    3,000,000.00 $ 2,800,000.00 year of life 12 12 12 Annual Depreciation $       390,000.00 $       250,000.00 $      233,333.33 Sales 13000000 14000000 16000000 Variable cost %age 78% 76% 74% Variable cost 10140000 10640000 11840000 Contribution 2860000 3360000 4160000 Fixed Cost 2400000 2200000 1900000 Less: Depreciation $       390,000.00 $       250,000.00 $      233,333.33 Total Fixed Cost $    2,790,000.00 $    2,450,000.00 $ 2,133,333.33 Net Income $          70,000.00 $       910,000.00 $ 2,026,666.67 Tax @40% $          28,000.00 $       364,000.00 $      810,666.67 Income after Tax $          42,000.00 $       546,000.00 $ 1,216,000.00 Add: Depreciation $       390,000.00 $       250,000.00 $      233,333.33 Operating cashflows $       432,000.00 $       796,000.00 $ 1,449,333.33 Cash flows pv factor Present Balue Year Pessimistic Expected Optimistic at 8% Pessimistic Expected Optimistic 0 -4,680,000.00 -3,000,000.00 -2,800,000.00 1.00 -4,680,000.00 -3,000,000.00 -2,800,000.00 1 432,000.00 796,000.00 1,449,333.33 0.93 400,000.00 737,037.04 1,341,975.31 2 432,000.00 796,000.00 1,449,333.33 0.86 370,370.37 682,441.70 1,242,569.73 3 432,000.00 796,000.00 1,449,333.33 0.79 342,935.53 631,890.46 1,150,527.53 4 432,000.00 796,000.00 1,449,333.33 0.74 317,532.90 585,083.76 1,065,303.27 5 432,000.00 796,000.00 1,449,333.33 0.68 294,011.94 541,744.22 986,391.91 6 432,000.00 796,000.00 1,449,333.33 0.63 272,233.28 501,615.02 913,325.85 7 432,000.00 796,000.00 1,449,333.33 0.58 252,067.85 464,458.35 845,672.08 8 432,000.00 796,000.00 1,449,333.33 0.54 233,396.16 430,054.03 783,029.70 9 432,000.00 796,000.00 1,449,333.33 0.50 216,107.55 398,198.18 725,027.50 10 432,000.00 796,000.00 1,449,333.33 0.46 200,099.59 368,702.02 671,321.76 11 432,000.00 796,000.00 1,449,333.33 0.43 185,277.40 341,390.76 621,594.22 12 432,000.00 796,000.00 1,449,333.33 0.40 171,553.14 316,102.55 575,550.21 Total -1,424,414.30 2,998,718.10 8,122,289.07 Answer: NPV -1,424,414.30 2,998,718.10 8,122,289.07

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