We are evaluating a project that costs $1,120,000, has a ten-year life, and has

Question

We are evaluating a project that costs $1,120,000, has a ten-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 64,000 units per year. Price per unit is $50, variable cost per unit is $25, and fixed costs are $620,000 per year. The tax rate is 35 percent, and we require a 12 percent return on this project.

We are evaluating a project that costs $1,120,000, has a ten-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 64,000 units per year. Price per unit is $50, variable cost per unit is $25, and fixed costs are $620,000 per year. The tax rate is 35 percent, and we require a 12 percent return on this project.

Explanation / Answer

Project Has Positive NPV It should be selected

Sales $3,200,000.00 Less: Cost Varriable Cost $1,600,000.00 Fixed Cost $620,000.00 Depreciation $112,000.00 PBT $868,000.00 Less: Tax @35% $303,800.00 PAT $564,200.00 Add: Depreciation $112,000.00 Annual Cash Flow $676,200.00

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