We are evaluating a project that costs $644,000, has an eight-year life, and has
ID: 2643882 • Letter: W
Question
We are evaluating a project that costs $644,000, has an eight-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 70,000 units per year. Price per unit is $37, variable cost per unit is $21, and fixed costs are $725,000 per year. The tax rate is 35 percent, and we require a 15 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within
Explanation / Answer
Statement showing cash flows Best case Worst case Particulars Time PVF Amount PV Amount PV Cash Outlows - 1.0000 (644,000.00) (644,000.00) (644,000.00) (644,000.00) PV of Cash Outflows (644,000.00) (644,000.00) Cash Inflows 1-8 4.4873 695,140.00 3,119,301.72 (72,510.00) (325,374.12) PV of Cash Inflows - 3,119,301.72 (325,374.12) NPV 2,475,301.72 (969,374.12) Best case is Sales price and quantity increase by 10% and expenses decrease by 10% Worst case is Sales price and quantity decrease by 10% and expenses increase by 10% Quantity 77,000.00 63,000.00 Price 40.70 33.30 VC 18.90 23.10 Contribution per unit 21.80 10.20 Total Contribution 1,678,600.00 642,600.00 Fixed Costs 652,500.00 797,500.00 Depreciation(644,000/8) 80,500.00 80,500.00 Income 945,600.00 (235,400.00) Tax @35% 330,960.00 (82,390.00) Income after Tax 614,640.00 (153,010.00) Depreciation(644,000/8) 80,500.00 80,500.00 Cahs flows after tax 695,140.00 (72,510.00)
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