You are evaluating a project that costs $840,000, has seven-year life, and has n
ID: 2643221 • Letter: Y
Question
You are evaluating a project that costs $840,000, has seven-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 90,000 units per year. Price per unit is $40, variable cost per unit is $24, and fixed costs are $900,000 units per year. Tax rate is 40%, and you require a 12% return on this project.
suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 10%. Calculate the best-case and worst-case NPV figures.
Please detail calculation. Thanks!
Explanation / Answer
revenues at best case:
sales= 99,000 units, revenue= 99,000X40= 3,960,000
total variable cost= 24X99,000= 2,376,000, and fixed cost= 900,000
depreciation rate= 120,000
total net revenue =3,960,000- (2,376,000+900,000+120,000)
=564,000, deduct tax rate
= 564,000(1-0.4)= $338,400
the present value= 338,400X4.564= 1,544,457
NPV= 15544457- 840,000= $704,457
NPV at worst case:
sales= 81,000 units, revenues= 81,000X40= 3,240,000
variable cost= 81,000X24= 1,944,000, fixed cost = 900,000 and depreciation = 120,000
net revenue= 3,240,000- (1,944,000+900,000+120,000)
= 276,000, deduct tax
= 276,000 (1-0.4)= 165,600
present value for 7 years= 165,600X4.564= 755,798
NPV= 755,798- 840,000= (-84,201 negitive value)
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