A project currently generates sales of $11.8 million, variable costs equal to 50

Question

A project currently generates sales of $11.8 million, variable costs equal to 50% of sales, and fixed costs of $4 million. The firm’s tax rate is 50%.

A. What is the effect on project NPV, if sales increase from $11.8 million to $13.2 million?

B. What is the effect on project NPV, if variable costs increase to 60% of sales?

A project currently generates sales of $11.8 million, variable costs equal to 50% of sales, and fixed costs of $4 million. The firm’s tax rate is 50%.

The project will last for 10 years. The discount rate is 10%.

A. What is the effect on project NPV, if sales increase from $11.8 million to $13.2 million?

B. What is the effect on project NPV, if variable costs increase to 60% of sales?

Explanation / Answer

Ans

Ans 1 Increase in Sales net of tax (13.2-11.8)*.50         7,00,000.00 PVAF for 10% (1-(1.1^-10))/0.1                       6.14 Increase in NPV 700000*6.14457       43,01,196.97 Ans 2 Variable Cost 50% of sales=11.8*.50                       5.90 Increase in VC 60% of sales=11.8*.60                       7.08 Difference in VC net of Tax (50% of sales-60% of sales)*.50       -5,90,000.00 PVAF for 10%                       6.14 Decrease in NPV     -36,25,294.59

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