We are evaluating a project that costs $1,180,000, has a ten-year life, and has
ID: 2753604 • Letter: W
Question
We are evaluating a project that costs $1,180,000, has a ten-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 66,000 units per year. Price per unit is $45, variable cost per unit is $25, and fixed costs are $750,000 per year. The tax rate is 35 percent, and we require a return of 15 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.)
NPv Best Case Worst CaseExplanation / Answer
Cost of project $ 1,180,000.00 Life of Project 10 yrs Depriciation $ 118,000.00 Sale price 45 Variable Cost $ 25.00 Fixed Cost 750000 Tax 35% Sales 66000 UNITS Cash flows Contribution/unit $ 20.00 Total contribution $ 1,320,000.00 Depriciation $ 118,000.00 Profit after depr. $ 1,202,000.00 Less:Fixed Costs 750000 Net $ 452,000.00 Tax $ 158,200.00 PAT $ 293,800.00 Add: Depr*(1-tax) $ 76,700.00 Cash flows $ 370,500.00 NPV $ 986,450.62 Change NPV Sale price+10% $ 2,115,285.42 Sale price(-10%) $ (142,384.18) Variable cost+10% $ 359,320.18 Variable cost-10% $ 1,613,581.06 Fixed cost +10% $ 701,391.33 Fixed cost -10% $ 1,271,509.91 Sale units+10% $ 1,488,154.98 Sale units-10% $ 484,746.27
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