We are evaluating a project that costs $768,000, has a six-year life, and has no
ID: 2653058 • Letter: W
Question
We are evaluating a project that costs $768,000, has a six-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 57,000 units per year. Price per unit is $60, variable cost per unit is $35, and fixed costs are $770,000 per year. The tax rate is 35 percent, and we require a return of 15 percent on this project. 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.
Explanation / Answer
Answer:
Calculation of NPV - Best Case
Year
Cash flow (CF)
PVF (15%)
PV = CF *PVF
Inititial Cost of the project
0
$ (768,000.00)
1.00000
$ (768,000.00)
Annual Sales (57000 Units * $60)*110%
$ 3,762,000.00
Less: Variable Costs (57000 Units *$35)*90%
$ (1,795,500.00)
Less: Fixed Costs (770000*90%)
$ (693,000.00)
Less: Depreciation (768000/6)
$ (128,000.00)
Profit Before tax
$ 1,145,500.00
Less: Tax @35%
$ (400,925.00)
Profit after tax
$ 744,575.00
Add: Depreciation
$ 128,000.00
Cash flows after tax
1 to 6
$ 872,575.00
3.78448
$ 3,302,244.99
NPV = Sum of PVs
$ 2,534,244.99
Calculation of NPV - Worst Case
Year
Cash flow (CF)
PVF (15%)
PV = CF *PVF
Inititial Cost of the project
0
$ (768,000.00)
1.00000
$ (768,000.00)
Annual Sales (57000 Units * $60)*90%
$ 3,078,000.00
Less: Variable Costs (57000 Units *$35)*110%
$ (2,194,500.00)
Less: Fixed Costs (770000*110%)
$ (847,000.00)
Less: Depreciation (768000/6)
$ (128,000.00)
Profit Before tax
$ (91,500.00)
Less: Tax @35%
$ 32,025.00
Profit after tax
$ (59,475.00)
Add: Depreciation
$ 128,000.00
Cash flows after tax
1 to 6
$ 68,525.00
3.78448
$ 259,331.68
NPV = Sum of PVs
$ (508,668.32)
Calculation of NPV - Best Case
Year
Cash flow (CF)
PVF (15%)
PV = CF *PVF
Inititial Cost of the project
0
$ (768,000.00)
1.00000
$ (768,000.00)
Annual Sales (57000 Units * $60)*110%
$ 3,762,000.00
Less: Variable Costs (57000 Units *$35)*90%
$ (1,795,500.00)
Less: Fixed Costs (770000*90%)
$ (693,000.00)
Less: Depreciation (768000/6)
$ (128,000.00)
Profit Before tax
$ 1,145,500.00
Less: Tax @35%
$ (400,925.00)
Profit after tax
$ 744,575.00
Add: Depreciation
$ 128,000.00
Cash flows after tax
1 to 6
$ 872,575.00
3.78448
$ 3,302,244.99
NPV = Sum of PVs
$ 2,534,244.99
Calculation of NPV - Worst Case
Year
Cash flow (CF)
PVF (15%)
PV = CF *PVF
Inititial Cost of the project
0
$ (768,000.00)
1.00000
$ (768,000.00)
Annual Sales (57000 Units * $60)*90%
$ 3,078,000.00
Less: Variable Costs (57000 Units *$35)*110%
$ (2,194,500.00)
Less: Fixed Costs (770000*110%)
$ (847,000.00)
Less: Depreciation (768000/6)
$ (128,000.00)
Profit Before tax
$ (91,500.00)
Less: Tax @35%
$ 32,025.00
Profit after tax
$ (59,475.00)
Add: Depreciation
$ 128,000.00
Cash flows after tax
1 to 6
$ 68,525.00
3.78448
$ 259,331.68
NPV = Sum of PVs
$ (508,668.32)
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