We are evaluating a project that costs $1077686, has a seven-year life, and has
ID: 2764603 • Letter: W
Question
We are evaluating a project that costs $1077686, 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 41111 units per year. Price per unit is $47, variable cost per unit is $21, and fixed costs are $821986 per year. The tax rate is 38 percent, and we require a 11 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-8 percent. What is the NPV of the project in worst-case scenario?
Explanation / Answer
Thw worst case scenarios is:
No. of units reduce by 8% = 41111*(1-0.08) = 37,822.12 Units
The price reduces by 8% = 47*(1-0.08) = 43.24
The varibale cost increases by 8% = 21*(1+0.08) = 22.68
The fixed costs increase by 8% = 821986*(1+0.08) = 887,744.88
The NPV calculation is a given below
Year 0 1 2 3 4 5 6 7 Cost -1077686 Revenue 1635428.47 1635428.47 1635428.47 1635428.47 1635428.47 1635428.47 1635428.47 Variable cost 857805.68 857805.6816 857805.6816 857805.6816 857805.6816 857805.6816 857805.6816 Fixed Costs 887744.88 887744.88 887744.88 887744.88 887744.88 887744.88 887744.88 Depreciation 153955.14 153955.1429 153955.1429 153955.1429 153955.1429 153955.1429 153955.1429 Profit before tax -264077.24 -264077.24 -264077.24 -264077.24 -264077.24 -264077.24 -264077.24 Taxes 0 0 0 0 0 0 0 Profit after tax -264077.24 -264077.24 -264077.24 -264077.24 -264077.24 -264077.24 -264077.24 Add back depreciation 153955.14 153955.1429 153955.1429 153955.1429 153955.1429 153955.1429 153955.1429 Net Cash flow -1077686 -110122.09 -110122.09 -110122.09 -110122.09 -110122.09 -110122.09 -110122.09 NPV $ -1,596,602.91Related Questions
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