We are evaluating a project that costs $1.694.000. has a seven-year life, and ha

Question

We are evaluating a project that costs $1.694.000. 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 88.700 units per year Price per unit is $35.10. variable cost per unit is $21.35. and fixed costs are $767.000 per year. The tax rate is 40 percent, and we require a return of 12 percent on this project. Required: Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within plusminus 10 percent. Calculate the best-case and worst-case NPV figures. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Sales [ 88700*35.10] 3113370

Variable cost (1893745)

Contribution 1219625

Fixed expenses (767000)

Net income 452625

Tax@40% (181050)

Profit after tax 271575

Year PAT Discount@12% PVCF discount@4% PVCF

1 271575 0.8929 242489 0.9615 261119

2 271575 0.7972 216500 0.9246 251098

3 271575 0.7118 193307 0.8890 241430

4 271575 0.6355 172586 0.8548 232142

5 271575 0.5674 154092 0.8219 223207

6 271575 0.5066 137580 0.7903 214626

7 271575 0.4523 122833 0.7599 206370

PV cash flows 1239387 1629992

iinitial investment (1694000) (1694000)

NPV (454613) (64008)

Worst case @12% (454613)

Best case @ 2%.

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