We are evaluating a project that costs $924,000, has an eight-year life, and has

Question

We are evaluating a project that costs $924,000, 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 75,000 units per year. Price per unit is $46, variable cost per unit is $31, and fixed costs are $825,000 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

Cash flow Best case Worst case Normal Selling Price for 75000 units 3795000 3105000 3450000 Less:Variable Cost -2092500 -2557500 -2325000 Less:Fixed Cost ( say included Depreciation) -742500 -907500 -825000 PBT 960000 -360000 300000 Tax @ 35% -336000 126000 -105000 Profit After tax 624000 -234000 195000 Add: Depreciation 115500 115500 115500 Cash flow 739500 -118500 310500 PV of Cashflows Year Best case Worst case Normal PV Factor @ 15% Best case Worst case Normal 0 -924000 -924000 -924000 1 -924000 -924000 -924000 1 739500 -118500 310500 0.869565217 643043.4783 -103043.4783 270000 2 739500 -118500 310500 0.756143667 559168.242 -89603.02457 234782.6087 3 739500 -118500 310500 0.657516232 486233.2539 -77915.67354 204158.7902 4 739500 -118500 310500 0.571753246 422811.5251 -67752.7596 177529.3828 5 739500 -118500 310500 0.497176735 367662.1958 -58915.44313 154373.3763 6 739500 -118500 310500 0.432327596 319706.2572 -51230.82012 134237.7185 7 739500 -118500 310500 0.37593704 278005.441 -44548.53923 116728.4509 8 739500 -118500 310500 0.326901774 241743.8618 -38737.8602 101503.0008 NPV 23,94,374.25 -14,55,747.60 4,69,313.33

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