We are evaluating a project that costs $1,220,000, has a five-year life, and has
ID: 2725274 • Letter: W
Question
We are evaluating a project that costs $1,220,000, has a five-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 88,900 units per year. Price per unit is $35.20, variable cost per unit is $21.45, and fixed costs are $769,000 per year. The tax rate is 30 percent, and we require a return of 10 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).)
Explanation / Answer
Cash outflow
1,220,000
Present value factor
1
Present value of cash outflow
1,220,000
Present case
Case 1 (+10%)
Case 2 (-10%)
Sales (in units)
88900
97790
80010
Price
$35.20
38.72
31.68
Variable cost
21.45
23.595
19.305
Contribution (in $)
$13.75
15.125
12.375
Total contribution
1,222,375
1479074
990123.8
Less- fixed cost
769,000
845900
692100
Profit
453,375
633173.8
298023.8
Add- tax savings due to depreciation
73,200
73,200
73,200
Cash inflows
526,575
7,06,374
3,71,224
Cumulative Present value factor
3.791
3.791
3.791
Present value of cash inflow
1996246
2677863
1407309
Net present value = Present value of cash inflow - Present value of cash outflow
Present value of cash inflow
1996246
2677863
1407309
Present value of cash outflow
1,220,000
1,220,000
1,220,000
Net present value
776,246
1,457,863
187,309
Best case
Worst case
Cash outflow
1,220,000
Present value factor
1
Present value of cash outflow
1,220,000
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