We are evaluating a project that costs $1035725, has a seven-year life, and has

Question

We are evaluating a project that costs $1035725, 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 41186 units per year. Price per unit is $53, variable cost per unit is $22, and fixed costs are $804779 per year. The tax rate is 37 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 +/-12 percent. What is the NPV of the project in best-case scenario?

Explanation / Answer

Figures in $ Year Contribution Fixed costs Profit before tax Profit after tax Depreciation tax benefit Intial costs Cashflow Disc Rate : 11% Present value A B C D E F G H A-B C*(1-tax rate) D+E+F G*H (1035725/7)*0.37 0 -1035725 -1035725 1.00 -1035725.00 1 1276766 804779 471987 297351.81 54745.46 352097.3 0.90 317204.75 2 1276766 804779 471987 297351.81 54745.46 352097.3 0.81 285770.05 3 1276766 804779 471987 297351.81 54745.46 352097.3 0.73 257450.49 4 1276766 804779 471987 297351.81 54745.46 352097.3 0.66 231937.38 5 1276766 804779 471987 297351.81 54745.46 352097.3 0.59 208952.60 6 1276766 804779 471987 297351.81 54745.46 352097.3 0.53 188245.58 7 1276766 804779 471987 297351.81 54745.46 352097.3 0.48 169590.61 Net present value (NPV) 623426.46

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