We are evaluating a project that costs $940,000, has a four-year life, and has n

Question

We are evaluating a project that costs $940,000, 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 88,000 units per year. Price per unit is $34.75, variable cost per unit is $21.00, and fixed costs are $760,000 per year. The tax rate is 30 percent, and we require a return of 13 percent on this project. Required: 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. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).) NPV Best-case $ Worst-case $

Explanation / Answer

cost of the project = $940,000 life = 4 years sales = 3,058,000 fixed costs = 760,000 variable costs = $ 21X88000 = 1,848,000 depreciation per year = 235,000 year 1 year 2 year 3 year 4 operating cash flow 215,000 215,000 215,000 215,000 year Operating cash flows discount factor@13% Present value 0 $940,000 1 215,000 0.885 190275 2 215,000 0.783 168345 3 215,000 0.693 148995 4 215,000 0.613 131795 639410 Net present value = -940,000+639,410 X 0.70 = -$492,413 worst case NPV= -541,654.30 Best case NPV = -$443,171.70

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