We are evaluating a project that costs $972,000, has a four-year life, and has n
ID: 2501254 • Letter: W
Question
We are evaluating a project that costs $972,000, has a four-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 88,800 units per year. Price per unit is $35,15, variable cost per unit is $21.40, and fixed cost are $768,000 per year. The tax rate is 35 percent, and we required a return of 13 percent on this project. Suppose the projections given for price, quality, variable costs, and fixed costs are all accurate to within plusminus percent. Calculate the best-case and worst-case NPV figures.Explanation / Answer
Net present value of project = Present value of cash Inflow - Present value of cash outflow
Present value of cash outflow
Particulars
(at Y= 0) Amount
Cash outflow
972000
PVF (Y=0)
1
Present value of cash outflow
972000
Present value of cash In flow
Particulars
BEST CASE
WORST CASE
Sale units
97680
79920
Sale price
38.665
31.635
Cost
23.54
19.26
Contribution per unit
15.125
12.375
Contribution (in $)
1477410
989010
Less- FIXED COST
864600
707400
Net Profit
612810
281610
Add- tax saving due to depreciation
85050
85050
Net cash inflow
697860
366660
Cumulative PVF (13%, 4 years)
2.9745
2.9745
Present value of cash inflow
2075785
1090630
Less- Present value of cash outflow
972000
972000
Net present value
1103785
118630
Particulars
(at Y= 0) Amount
Cash outflow
972000
PVF (Y=0)
1
Present value of cash outflow
972000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.