We are evaluating a project that costs $1191258, has a seven-year life, and has
ID: 2748611 • Letter: W
Question
We are evaluating a project that costs $1191258, 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 42037 units per year. Price per unit is $55, variable cost per unit is $21, and fixed costs are $809243 per year. The tax rate is 39 percent, and we require a 8 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-11 percent. What is the NPV of the project in worst-case scenario? (Negative amount should be indicated by a minus sign.
Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)
Explanation / Answer
Normal Case Worst Case Total Per unit Total Per unit Sales units 42037 37413 Sales 2312035 55 1831366 48.95 Less: Variable Cost 882777 21 872097 23.31 Contribution 1429258 34 959269.3 25.64 Less: Fixed Cost 809243 19.25 898259.7 24.01 Net Income 620015 61009.59 Less: Tax @39% 241805.85 23793.74 Income after Tax 378209.15 37215.85 Add back Depreciation 170179.71 170179.7 Operating Cashflows 548388.86 207395.6 Cash Pv factor Present Year Flows at 8% Value 0 -1191258 1 -1191258 1 207395.56 0.925926 192032.93 2 207395.56 0.857339 177808.27 3 207395.56 0.793832 164637.29 4 207395.56 0.73503 152441.93 5 207395.56 0.680583 141149.94 6 207395.56 0.63017 130694.39 7 207395.56 0.58349 121013.32 Total -111479.94 Net present value of the project is - 111480. Note: for worst case sale price = 55 x (1-0.11)=48.95 for revenue worst case means revenue is to be reduced and for expenses it is just opposite. example, Variable cost in worst case = 21 x (1+0.11)=23.31
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