Range Assume the project life is 12 years, the tax rate is 40%, the discount rat

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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.)

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

Explanation / Answer

For calculating the MPV under each situation of pessimistic, expected and optimistic we will have to calculate the after tax operating cash flow (OCF).

(i) pessimistic condition:

Initial investment (cash outflow) = $4,920,000.

sales - variable costs - fixed costs = 13,000,000 - 74% of 13,000,000 - 3,100,000 = $280,000

after tax income = 280,000*(1-40%) = 168,000. Tax shield of depreciation = depreciation per year*tax rate = (4.920,000/12)*40% = 164,000

OCF = after tax income+depreciation tax shield = 168,000+164,000 = 332,000. This is the OCF for the period 1-12 years.

(ii) expected situation:

Initial investment (cash outflow) = 4,800,000

sales - variable costs - fixed costs = 19,000,000 - 72% of 19,000,000 - 2,900,000 = 2,420,000

after tax income = 2,420,000*(1-40%) = 1,452,000. Tax shield of depreciation = depreciation per year*tax rate = 4,800,000/12*40% = 160,000. OCF = 1,452,000+160,000 = 1,612,000

(iii) optimistic situation:

Initial investment (cash outflow) = 4,000,000

sales - variable costs - fixed costs = 27,000,000 - 71% of 27,000,000 - 2,700,000 = 5,130,000. after tax income = 5,130,000*(1-40%) = 3,078,000

Tax shield of depreciation = depreciation per year*tax rate = 4,000,000/12*40% = 133,333.33. OCF = 3,078,000+133,333.33 = 3,211,333.33

Year Discount factor Cash flow PV 0 1.08 -4,920,000 -4,920,000 1 332,000 307,407 2 332,000 284,636 3 332,000 263,552 4 332,000 244,030 5 332,000 225,954 6 332,000 209,216 7 332,000 193,719 8 332,000 179,369 9 332,000 166,083 10 332,000 153,780 11 332,000 142,389 12 332,000 131,842 NPV -2,418,022

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