We are evaluating a project that costs $520,000, has a six-year life, and has no
ID: 2726623 • Letter: W
Question
We are evaluating a project that costs $520,000, has a six-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 65,000 units per year. Price per unit is $45, variable cost per unit is $30, and fixed costs are $840,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project. 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. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.)
We are evaluating a project that costs $520,000, has a six-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 65,000 units per year. Price per unit is $45, variable cost per unit is $30, and fixed costs are $840,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent.
Explanation / Answer
(1) NPVs in case of variation in Selling Price
(2) NPVs in case of variation in quantity:
(3) NPVs in case of variation in Variable Cost
(All figures in $, except sales unit) Computaton of NPV (1)Variation in Selling Price Present case (+)10% (-)10% a Sales in units 65,000.00 65,000.00 65,000.00 b Selling Price per unit 45.00 49.50 40.50 c Sales Value ( a x b) 2,925,000.00 3,217,500.00 2,632,500.00 d Variable Cost $30 x a (1,950,000.00) (1,950,000.00) (1,950,000.00) e Contribution Margin ( c -d ) 975,000.00 1,267,500.00 682,500.00 f Fixed Cost -840,000.00 -840,000.00 -840,000.00 g Depreciation $520,000/6 yrs (86,666.67) (86,666.67) (86,666.67) h EBT /(loss) (e -f-g) 48,333.33 340,833.33 (244,166.67) i Tax 35% of EBT (16,916.67) (119,291.67) j EAT/(loss) 31,416.67 221,541.67 (244,166.67) k Add back of depreciation fund $520,000/6 yrs 86,666.67 86,666.67 86,666.67 l Free Cash Flow per year (j + k) 118,083.33 308,208.33 (157,500.00) m Discounted Free Cash Flow l x PVIFA10%,6y 514,252.92 1,342,247.29 (685,912.50) n Initial Cost 520,000.00 520,000.00 520,000.00 o NPV ( m - n) (5,747.08) 822,247.29 (1,205,912.50) Variation in Selling Price NPV ($) NPV in Best Case 822247.29 NPV in worst case -1205912.50Related Questions
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