We are evaluating a project that costs $1106932, has a seven-year life, and has

Question

We are evaluating a project that costs $1106932, has a seven-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 40774 units per year. Price per unit is $46, variable cost per unit is $23, and fixed costs are $821848 per year. The tax rate is 38 percent, and we require a 7 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-12 percent. What is the NPV of the project in worst-case scenario? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Explanation / Answer

Particulars Present scenerio Worst scenerio @0.88 Best scenerio@1.12 Sale price 46 40.48 51.52 Less: Variable cost 23 20.24 25.76 Contribution per unit 23 20.24 25.76 Number of units 40774 35881.12 45666.88 Contribution margin 937802 726233.8688 1176378.829 Less: Fixed Cost 821848 723226.24 920469.76 Profit 115954 3007.6288 255909.0688 Less: Depreciation 158133.143 158133.1429 158133.1429 Cash Flow before tax -42179.143 -155125.5141 97775.92594 Tax@38% -16028.074 -58947.69534 37154.85186 Cash flow after tax -26151.069 -96177.81872 60621.07408 Add: Depreciation 158133.143 158133.1429 158133.1429 Cash Flows 131982.074 61955.32414 218754.2169 NPV of WORST scenerio Year Cash Flows Discount @0.07 Discounted cash flows 0 -1106932 1 -1106932 1 61955.32414 0.93457944 57902.17209 2 61955.32414 0.87343873 54114.17953 3 61955.32414 0.81629788 50573.99956 4 61955.32414 0.76289521 47265.42015 5 61955.32414 0.71298618 44173.28986 6 61955.32414 0.66634222 41283.44846 7 61955.32414 0.62274974 38582.66212 Net Present value of worst scenerio -773036.8282 NPV of present scenerio Year Cash Flows Discount @0.07 Discounted cash flows 0 -1106932 1 -1106932 1 131982.074 0.93457944 123347.7327 2 131982.074 0.87343873 115278.2549 3 131982.074 0.81629788 107736.6868 4 131982.074 0.76289521 100688.4923 5 131982.074 0.71298618 94101.3947 6 131982.074 0.66634222 87945.22869 7 131982.074 0.62274974 82191.80252 Net Present value of worst scenerio -395642.4074 NPV of BEST scenerio Year Cash Flows Discount @0.07 Discounted cash flows 0 -1106932 1 -1106932 1 218754.2169 0.93457944 204443.1934 2 218754.2169 0.87343873 191068.405 3 218754.2169 0.81629788 178568.6028 4 218754.2169 0.76289521 166886.5447 5 218754.2169 0.71298618 155968.7334 6 218754.2169 0.66634222 145765.1714 7 218754.2169 0.62274974 136229.1321 Net Present value of worst scenerio 71997.78271

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