We are evaluating a project that costs $1,140,000, has a five-year life, and has
ID: 2719931 • Letter: W
Question
We are evaluating a project that costs $1,140,000, 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 87,300 units per year. Price per unit is $34.40, variable cost per unit is $20.65, and fixed costs are $753,000 per year. The tax rate is 35 percent, and we require a return of 10 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.
We are evaluating a project that costs $1,140,000, 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 87,300 units per year. Price per unit is $34.40, variable cost per unit is $20.65, and fixed costs are $753,000 per year. The tax rate is 35 percent, and we require a return of 10 percent on this project.
Explanation / Answer
-10%(ie 90 % of base case)
+10%(ie 110 % of base case)
Base case
Worst-case
Best-case
Unit Sales
87,300
78,570
96,030
Price Per Unit
34.40
30.96
37.84
Variable cost Per Unit
20.65
18.59
22.72
Fixed cost per Year
753,000.00
677,700.00
828,300.00
Scenario
Unit Sales
Unit Price
Unit Variable Cost
Fixed Cost
Cash Flow
Base case
87,300
34.40
20.65
753,000.00
447,375.00
Worst-case
78,570
30.96
18.59
677,700.00
294,603.75
Best-case
96,030
37.84
22.72
828,300.00
624,153.75
At 10 percent, the five-year annuity factor is 3.7908, so the NPVs are:
Base-case NPV = -1,140,000 + 3.7908 x $ 447,375.00= $555,909.15
Worst-case NPV = -1,140,000 + 3.7908 x $ 294,603.75 = $(23,216.10)
Best-case NPV = -1,140,000 + 3.7908 x $ 624,153.75 =$ 1,226,042.04
-10%(ie 90 % of base case)
+10%(ie 110 % of base case)
Base case
Worst-case
Best-case
Unit Sales
87,300
78,570
96,030
Price Per Unit
34.40
30.96
37.84
Variable cost Per Unit
20.65
18.59
22.72
Fixed cost per Year
753,000.00
677,700.00
828,300.00
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