We are evaluating a project that costs $1,666,000, has a seven-year life, and ha

Question

We are evaluating a project that costs $1,666,000, 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 88,300 units per year. Price per unit is $34.90, variable cost per unit is $21.15, and fixed costs are $763,000 per year. The tax rate is 30 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 $

NPV Worst-case $

Explanation / Answer

We need to construct a basic income statement. The income statement is:

The OCF for the company is:

OCF = EBIT + Depreciation – Taxes           

OCF = $915,584.48+ 277,667.67–274,675.35

OCFbest = $918,575.81

The best-case NPV is:

NPV best= 1,666,000+918,578.91*(PVIFA 12%,7)

NPV best = 1,666,000+918,579.91*4.5638 = $2,526,196.26

For the worst case:

OCF = EBIT+Depreciation-Taxes

OCF =-51,111.80

NPVworst = -1,666,000+51,111.80*PVIFA(12%,7) =$1,899,264,.01

Sales          88,300 1.1           97,130 Price 34.9 1.1             38.39 VC/unit 21.15 0.9             19.04 FC        763,000 0.9         686,700 Dep      1,666,000 6         277,667

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.