3. 5 years’ project is defined as it follows: • Revenues are $645,000 the first

Question

3. 5 years’ project is defined as it follows: • Revenues are $645,000 the first year and will increase 3% per year for the next 4 years. • Fixed cost are $52,000 and they will increase 5% the first 2 years and will remain constant for the following years. • Variable cost is assumed to be 8% of the Revenues. • The initial investment is $800,000 • Fixed assets are priced at $250,000 and they are depreciated linearly for 5 years with a residual value of zero. • Taxes are 35% Calculate: a) Revenues per year b) Variable Cost per year c) Fixed Cost per year d) EBIT per year.

Explanation / Answer

Answer a Calculation of Revenues Year Calculation Revenues 1 $645,000.00 2 = $645000*103% $664,350.00 3 = $664350 * 103% $684,280.50 4 = $684280.50 * 103% $704,808.92 5 = $704808.92 * 103% $725,953.18 Answer b Calculation of Variable Costs Year Revenues Variable Cost A   B B*8% 1 $645,000.00 $51,600.00 2 $664,350.00 $53,148.00 3 $684,280.50 $54,742.44 4 $704,808.92 $56,384.71 5 $725,953.18 $58,076.25 Answer c Calculation of Fixed Costs Year Fixed Cost other than depreciation Depreciation Total Fixed Cost A   B C B+C 1 $54,600 $50,000 $104,600 2 $57,330 $50,000 $107,330 3 $57,330 $50,000 $107,330 4 $57,330 $50,000 $107,330 5 $57,330 $50,000 $107,330 Answer d Calculation of EBIT Year Revenues Variable Costs Fixed Costs EBIT A   B C D B-C-D 1 $645,000.00 $51,600.00 $104,600 $488,800.00 2 $664,350.00 $53,148.00 $107,330 $503,872.00 3 $684,280.50 $54,742.44 $107,330 $522,208.06 4 $704,808.92 $56,384.71 $107,330 $541,094.20 5 $725,953.18 $58,076.25 $107,330 $560,546.93

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