GBK, Inc. is considering a new product. The proposal is as follows: Project cost
ID: 2624236 • Letter: G
Question
GBK, Inc. is considering a new product. The proposal is as follows:
Project cost: $2,000,000
Project life: 5 yrs
Salvage value: zero
Depreciation: straight line to zero
Sales projection: 180 units per year
Price per unit: $20,000
Variable cost per unit will be: $12,400
Fixed costs per year: $490,000
Required return on the project: 10%
Relevant tax rate: 35%
Based on our past experience, the unit sales, variable costs and fixed cost projections are probably accurate to within plus or minus 10%
A] What are the upper and lower bounds for these projections?
B] What is the base case NPV?
C] What are the best case and the worst case scenarios?
Explanation / Answer
Particulars
Upper Boundary
Lower Boundary
Unit Sales
180*1.10
= 198
180*0.90
= 162
Variable Costs
12400*1.10
= 13640
12400*0.90
= 11160
Fixed costs per year
490000*1.10
= 539000
490000*0.90
= 441000
Particulars
Upper Boundary
Lower Boundary
Sales
(198*20000)
= 3960000
(162*20000)
= 3240000
Less:- Variable cost
(198*12400)
= 2455200
(162*12400)
= 2008800
Less:- Fixed cost
539000
441000
Less:- Depreciation [2,000,000/5]
400000
400000
Profit Before tax
565800
390200
Less:-Taxes @ 35%
198030
136570
Profit after tax
367770
253630
Add:- Depreciation
400000
400000
Net Cash flow
767770
653630
What is the base case NPV?
Base-case Cash flow = [(20000-12400)*180
Particulars
Upper Boundary
Lower Boundary
Unit Sales
180*1.10
= 198
180*0.90
= 162
Variable Costs
12400*1.10
= 13640
12400*0.90
= 11160
Fixed costs per year
490000*1.10
= 539000
490000*0.90
= 441000
Particulars
Upper Boundary
Lower Boundary
Sales
(198*20000)
= 3960000
(162*20000)
= 3240000
Less:- Variable cost
(198*12400)
= 2455200
(162*12400)
= 2008800
Less:- Fixed cost
539000
441000
Less:- Depreciation [2,000,000/5]
400000
400000
Profit Before tax
565800
390200
Less:-Taxes @ 35%
198030
136570
Profit after tax
367770
253630
Add:- Depreciation
400000
400000
Net Cash flow
767770
653630
What is the base case NPV?
Base-case Cash flow = [(20000-12400)*180
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.