Range Assume the project life is 12 years, the tax rate is 40%, the discount rat
ID: 2716231 • Letter: R
Question
Range
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
Finefodder’s analysts have come up with the following revised estimates for the Gravenstein store:Explanation / Answer
The required table is as below:
Pessimistic
Expected
Optimistic
Sales
14,000,000
16,000,000
20,000,000
Less: Variable cost
11,200,000
12,640,000
15,600,000
Contribution
2,800,000
3,360,000
4,400,000
Less: Fixed cost
2,200,000
2,000,000
1,700,000
Profit
600,000
1,360,000
2,700,000
Less: 40% tax
240,000
544,000
1,080,000
Add: Depreciation
450,000
430,000
400,000
Cash flow
810,000
1,246,000
2,020,000
8% accumulated PV factors for 12 years
7.5361
7.5361
7.5361
PV of cash flow
6,104,241
9,389,980.6
15,222,922
Less: Investment
5,400,000
5,160,000
4,800,000
NPV
704,241
4,229,980.6
10,422,922
Sensitivity analysis:
The project is sensitive for increase in sales. Only {(2,000,000/14,000,000) × 100 =} 14.3% increase in sales causing NPV increases.
Variable cost is not so sensitive as sales. Increase in variable cost is {(1,440,000/11,200,000) × 100 =} 12.9%, but increase in sale is 14.3%. It has positive effect on NPV.
The project is sensitive for decrease in fixed cost too. Fixed cost is decreasing in each level.
Pessimistic
Expected
Optimistic
Sales
14,000,000
16,000,000
20,000,000
Less: Variable cost
11,200,000
12,640,000
15,600,000
Contribution
2,800,000
3,360,000
4,400,000
Less: Fixed cost
2,200,000
2,000,000
1,700,000
Profit
600,000
1,360,000
2,700,000
Less: 40% tax
240,000
544,000
1,080,000
Add: Depreciation
450,000
430,000
400,000
Cash flow
810,000
1,246,000
2,020,000
8% accumulated PV factors for 12 years
7.5361
7.5361
7.5361
PV of cash flow
6,104,241
9,389,980.6
15,222,922
Less: Investment
5,400,000
5,160,000
4,800,000
NPV
704,241
4,229,980.6
10,422,922
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