Problem 9-19 Scenario Analysis [LO 3] We are evaluating a project that costs $1,
ID: 2720960 • Letter: P
Question
Problem 9-19 Scenario Analysis [LO 3] We are evaluating a project that costs $1,694,000, 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 88,700 units per year. Price per unit is $35.10, variable cost per unit is $21.35, and fixed costs are $767,000 per year. The tax rate is 40 percent, and we require a return of 12 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
Scenario data Details Base Case Best Case Worst Case Sales Qty 88,700 97,570 79,830 Unit Price 35.10 38.61 31.59 Unit Variable cost 21.35 19.2 23.49 Fixed Cost 767,000 690,300 843,700 Yearly Revenue 3,113,370 3,767,178 2,521,830 Yearly variable cost 1,893,745 1,874,808 1,874,808 Assume fixed cost does not include depreciation NPV Best Case: Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Investment (1,694,000) Yearly Revenue 3,767,178 3,767,178 3,767,178 3,767,178 3,767,178 3,767,178 3,767,178 Yearly variable Cost (1,874,808) (1,874,808) (1,874,808) (1,874,808) (1,874,808) (1,874,808) (1,874,808) Fixed costs (690,300) (690,300) (690,300) (690,300) (690,300) (690,300) (690,300) Depreciation (242,000) (242,000) (242,000) (242,000) (242,000) (242,000) (242,000) Taxable Income 960,070 960,070 960,070 960,070 960,070 960,070 960,070 Tax @40% (384,028) (384,028) (384,028) (384,028) (384,028) (384,028) (384,028) Post Tax income 576,042 576,042 576,042 576,042 576,042 576,042 576,042 Add Back depreciation 242,000 242,000 242,000 242,000 242,000 242,000 242,000 Net Cash flow (1,694,000) 818,042 818,042 818,042 818,042 818,042 818,042 818,042 PV factor @12% 1 0.893 0.797 0.712 0.636 0.567 0.507 0.452 PV of Cash flows (1,694,000) 730,395 652,138 582,266 519,881 464,179 414,446 370,041 NPV = $ 2,039,344.94 NPV worst Case: Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Investment (1,694,000) Yearly Revenue 2,521,830 2,521,830 2,521,830 2,521,830 2,521,830 2,521,830 2,521,830 Yearly variable Cost (1,874,808) (1,874,808) (1,874,808) (1,874,808) (1,874,808) (1,874,808) (1,874,808) Fixed costs (843,700) (843,700) (843,700) (843,700) (843,700) (843,700) (843,700) Depreciation (242,000) (242,000) (242,000) (242,000) (242,000) (242,000) (242,000) Taxable Income (438,678) (438,678) (438,678) (438,678) (438,678) (438,678) (438,678) Tax @40% 175,471 175,471 175,471 175,471 175,471 175,471 175,471 Post Tax income (263,207) (263,207) (263,207) (263,207) (263,207) (263,207) (263,207) Add Back depreciation 242,000 242,000 242,000 242,000 242,000 242,000 242,000 Net Cash flow (1,694,000) (21,207) (21,207) (21,207) (21,207) (21,207) (21,207) (21,207) PV factor @12% 1 0.893 0.797 0.712 0.636 0.567 0.507 0.452 PV of Cash flows (1,694,000) (18,935) (16,906) (15,095) (13,477) (12,033) (10,744) (9,593) NPV = $ (1,790,782.26)
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