We are evaluating a project that costs $972,000, has a four-year life, and has n
ID: 2712505 • Letter: W
Question
We are evaluating a project that costs $972,000, has a four-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 88,800 units per year. Price per unit is $35.15, variable cost per unit is $21.40, and fixed costs are $768,000 per year. The tax rate is 35 percent, and we require a return of 13 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. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)
Required: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. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Particulars Year PVF @ 13% Cash Flows Normal Cash Flows Worst Case Cash Flow Best Case PV Normal PV Worst Case PV Best Case Initial Investment 0 1 972000 972000 972000 972000 972000 972000 Variable Cost ( Net Of tax) 1 to 4 2.9745 1235208 1111687 1358729 36,74,126.20 33,06,712.98 40,41,539.41 Fixed Cost ( Net Of Tax) 1 to 4 2.9745 499200 499200 499200 14,84,870.40 14,84,870.40 14,84,870.40 Present Value Of cash outflows 6130996.596 5763583.382 6498409.811 Sales ( Net Of tax) 1 to 4 2.9745 1913418 1722076 2104760 56,91,461.84 51,22,315.06 62,60,608.62 Tax Saving on Depreciation 1 to 4 2.9745 85050 8500 85050 2,52,981.23 25,283.25 2,52,981.23 Present Value of cash Inflows 59,44,443.07 51,47,598.31 65,13,589.85 Net Present Value -1,86,553.53 -6,15,985.07 15,180.03
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