We are evaluating a project that costs $670,000, has a five-year life, and has n
ID: 2710727 • Letter: W
Question
We are evaluating a project that costs $670,000, has a five-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 59,000 units per year. Price per unit is $44, variable cost per unit is $24, and fixed costs are $760,000 per year. The tax rate is 35 percent, and we require a 18 percent return 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. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Calculate the best-case and worst-case NPV figures. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Selling Price = 44
Variable Cost = 24
Contribution per unit = 20
Total Contribution for 59,000 units = 20 X 59,000
= 1,180,000
Less: Fixed Cost = (760,000)
Less: Depreciation per annum (670,000/5) = (134,000)
Profit before Tax (PBT) = 286,000
Less: Tax @35% = 100,100
Profit after Tax = 185,900
Add: Depreciation = 134,000
Expected annual cash flow = 319,900
Base Case NPV
Period
Particulars
Amount
Discount Factor (@18%)
Present Value
0
Initial Cash Outflow
-670,000
1.000
-670,000
1
Cash Inflow
319,900
0.847
271,101.69
2
Cash Inflow
319,900
0.718
229,747.20
3
Cash Inflow
319,900
0.609
194,701.02
4
Cash Inflow
319,900
0.516
165,000.86
5
Cash Inflow
319,900
0.437
139,831.24
Total
330,382.01
Best Case NPV (assuming all costs and quantity to be up by 10%)
Contribution per unit = 20*110% = 22
No. of units = 59000*110% = 64,900
Total Contribution = 64,900*22 = 1,427,800
Less: Fixed Cost = 760,000*110% = 836,000
Less: Depreciation = 670,000/5 = 134,000
Profit before Tax (PBT) = 457,800
Less: Tax @35% = 160,230
Profit after Tax = 297,570
Add: Depreciation = 134,000
Expected annual cash flow = 431,570
Period
Particulars
Amount
Discount Factor (@18%)
Present Value
0
Initial Cash Outflow
-670,000
1.000
-670,000
1
Cash Inflow
431,570
0.847
365,737.29
2
Cash Inflow
431,570
0.718
309,946.85
3
Cash Inflow
431,570
0.609
262,666.83
4
Cash Inflow
431,570
0.516
222,599.00
5
Cash Inflow
431,570
0.437
188,643.22
Total Net Present Value
679,593.20
Worst Case NPV (assuming all costs and quantity to be down by 10%)
Contribution per unit = 20*90% = 18
No. of units = 59000*90% = 53,100
Total Contribution = 53,100*18 = 955,800
Less: Fixed Cost = 760,000*90% = 684,000
Less: Depreciation = 670,000/5 = 134,000
Profit before Tax (PBT) = 137,800
Less: Tax @35% = 48,230
Profit after Tax = 89,570
Add: Depreciation = 134,000
Expected annual cash flow = 223,570
Period
Particulars
Amount
Discount Factor (@18%)
Present Value
0
Initial Cash Outflow
-670,000
1.000
-670,000
1
Cash Inflow
223,570
0.847
189,466.10
2
Cash Inflow
223,570
0.718
160,564.49
3
Cash Inflow
223,570
0.609
136,071.60
4
Cash Inflow
223,570
0.516
115,314.92
5
Cash Inflow
223,570
0.437
97,724.51
Total Net Present Value
29,141.63
Best Case NPV = $ 679,573.20
Worst case NPV = $ 29,141.63
Period
Particulars
Amount
Discount Factor (@18%)
Present Value
0
Initial Cash Outflow
-670,000
1.000
-670,000
1
Cash Inflow
319,900
0.847
271,101.69
2
Cash Inflow
319,900
0.718
229,747.20
3
Cash Inflow
319,900
0.609
194,701.02
4
Cash Inflow
319,900
0.516
165,000.86
5
Cash Inflow
319,900
0.437
139,831.24
Total
330,382.01
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.