We are evaluating a project that costs $1,374,000, has a six-year life, and has
ID: 2782241 • Letter: W
Question
We are evaluating a project that costs $1,374,000, has a six-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 87,400 units per year. Price per unit is $34.45, variable cost per unit is $20.70, and fixed costs are $754,000 per year. The tax rate is 30 percent, and we require a return of 11 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.
Explanation / Answer
cost of a project
1374000
current level
base case with 10% increase
worst case with 10% decrease
sales in units
87400
96140
78300
selling price
34.45
37.895
31.005
total sales
3010930
3643225
2427692
variable cost per unit
20.7
22.77
18.63
total variable cost
1809180
2189108
1458729
contribution margin = total sales-total variable cost
1201750
1454118
968962.5
less fixed cost
754000
829400
678600
ebit
447750
624717.5
290362.5
less depreciation
229000
229000
229000
EBT
218750
395717.5
61362.5
less tax 30%
65625
118715.3
18408.75
EAT
153125
277002.3
42953.75
add depreciation
229000
229000
229000
EAT before depreciation
382125
506002.3
271953.8
PVAF at 11% for 6 years
1-(1+r)^-n /r
4.2305
4.2305
4.2305
sum of present value of cash inflow = earning after tax before depreciation*PVAF
1616580
2140643
1150500
less cost of a project
1374000
1374000
1374000
net present value
242579.8
766642.5
-223500
cost of a project
1374000
current level
base case with 10% increase
worst case with 10% decrease
sales in units
87400
96140
78300
selling price
34.45
37.895
31.005
total sales
3010930
3643225
2427692
variable cost per unit
20.7
22.77
18.63
total variable cost
1809180
2189108
1458729
contribution margin = total sales-total variable cost
1201750
1454118
968962.5
less fixed cost
754000
829400
678600
ebit
447750
624717.5
290362.5
less depreciation
229000
229000
229000
EBT
218750
395717.5
61362.5
less tax 30%
65625
118715.3
18408.75
EAT
153125
277002.3
42953.75
add depreciation
229000
229000
229000
EAT before depreciation
382125
506002.3
271953.8
PVAF at 11% for 6 years
1-(1+r)^-n /r
4.2305
4.2305
4.2305
sum of present value of cash inflow = earning after tax before depreciation*PVAF
1616580
2140643
1150500
less cost of a project
1374000
1374000
1374000
net present value
242579.8
766642.5
-223500
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.