We are evaluating a project that costs $1,666,000, has a seven-year life, and ha
ID: 2725582 • Letter: W
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 $ Worst-case $Explanation / Answer
Worst case Best Case Sales 88300 79470 97130 Price per unit 34.9 31.41 38.39 Variable Cost per unit 21.15 23.265 19.035 Fixed Cost 763000 839300 686700 Tax rate 30% Cash Flow Schedule Revenue $ 2,496,152.70 $ 3,728,820.70 Less: Variable Cost $ 1,848,869.55 $ 1,848,869.55 Contribution $ 647,283.15 $ 1,879,951.15 Less: Fixed Cost $ 839,300.00 $ 686,700.00 Less: Depreciation $ 238,000.00 $ 238,000.00 Net Income $ -430,016.85 $ 955,251.15 Tax @ 30% $ -129,005.06 $ 286,575.35 Income after Depreciation $ -301,011.80 $ 668,675.81 Add back Depreciation $ 238,000.00 $ 238,000.00 OCF $ -63,011.80 $ 906,675.81 Project cost $ 1,666,000 Life 7 Depreciation per year 238000 Worst Case Best Case $ -1,666,000.00 $ -1,666,000.00 $ -63,011.80 $ 906,675.81 $ -63,011.80 $ 906,675.81 $ -63,011.80 $ 906,675.81 $ -63,011.80 $ 906,675.81 $ -63,011.80 $ 906,675.81 $ -63,011.80 $ 906,675.81 $ -63,011.80 $ 906,675.81 $ -1,953,570.51 $ 2,471,847.66
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