We are evaluating a project that costs $972,000, has a four-year life, and has n

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 costs are $768,000 per year. The tax rate is 35 percent, and we require a return of 13 percent on this project.

Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within

Explanation / Answer

The best-base NPV is $1,609,342.17

The worst-base NPV is - $1,101,541.02

best-case NPV : price+10%, quantity+10%, variable costs-10%, and fixed costs-10% year ? 0 1 2 3 4 initial investment a -972,000.00 ? ? ? ? depreciation tax shield b=a/4*35% ? 85,050.00 85,050.00 85,050.00 85,050.00 aftertax sales c=35.15*1.1*88800*1.1*65% ? 2,454,918.18 2,454,918.18 2,454,918.18 2,454,918.18 aftertax variable costs d=-21.4*0.9*88800*1.1*65% ? -1,222,855.92 -1,222,855.92 -1,222,855.92 -1,222,855.92 aftertax fixed costs e=-768,000*0.9*65% ? -449,280.00 -449,280.00 -449,280.00 -449,280.00 OCF f=a+b+c+d+e -972,000.00 867,832.26 867,832.26 867,832.26 867,832.26 discount rate 13% ? ? ? ? ? NPV 1,609,342.17 -972,000.00 767,993.15 679,639.96 601,451.29 532,257.78

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