Need help with the worst case $ We are evaluating a project that costs $800,000,

Question

Need help with the worst case $

We are evaluating a project that costs $800,000, has an eight-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 60,000 units per year. Price per unit is $40, variable cost per unit is $20, and fixed costs are $800,000 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.)

NVP

Best Case $ 2840604

Worst Case $_______________

Explanation / Answer

Ans: Calculation of cash flow Unit Price Total Sales 60000 40 2400000 Less: Variable cost 60000 20 1200000 Contribution 1200000 Less fixed cost 800000 Profit before tax 400000 Less Tax@35% 140000 Profit after tax 260000 Add Tax save on depreciation 35000 Net cash inflow 295000 Note: Calculation of depreciation 800000/8=100000 Tax save on depreciation 100000*35%=35000 NPV= Cash inflow- Cash outflow NPV= 295000(PVAF10%, 8 years)-800000 295000*5.3349-800000*1 NPV=773795 Case 1 If sale price is increase by 10% ie 44 Unit Price Total Sales 60000 44 2640000 Less: Variable cost 60000 20 1200000 Contribution 1440000 Less fixed cost 800000 Profit before tax 640000 Less Tax@35% 224000 Profit after tax 416000 Add Tax save on depreciation 35000 Net cash inflow 451000 NPV= 451000(PVAF10%, 8 years)-800000 451000*5.3349-800000 NPV=1606040 If sale price decrease by 10%ie 36 Unit Price Total Sales 60000 36 2160000 Less: Variable cost 60000 20 1200000 Contribution 960000 Less fixed cost 800000 Profit before tax 160000 Less Tax@35% 56000 Profit after tax 104000 Add Tax save on depreciation 35000 Net cash inflow 139000 NPV= 139000(PVAF10%, 8 years)-800000 139000*5.3349-800000 NPV=-58449

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