We are evaluating a project that costs $1,220,000, has a five-year life, and has
ID: 2725782 • Letter: W
Question
We are evaluating a project that costs $1,220,000, 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 88,900 units per year. Price per unit is $35.20, variable cost per unit is $21.45, and fixed costs are $769,000 per year. The tax rate is 30 percent, and we require a return of 10 percent on this project. 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
Explanation / Answer
Details Base Case Best Case Worst Case Sales Qty 88,900 97,790 80,010 Sales price/unit 35.20 38.72 31.68 Variable cost/Unit 21.45 19.31 23.60 Contribution per unit 13.75 19.42 8.09 Total Contribution per year 1,222,375.00 1,898,592.85 646,880.85 Fixed cost 769,000.00 692,100.00 845,900.00 Assuming the fixed cost given is cash cost and does not include depreciation as nothimg mentioned clearly Best Case NPV Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment (1,220,000) Annual Contribution 1,898,592.85 1,898,592.85 1,898,592.85 1,898,592.85 1,898,592.85 Annual Fixed cost (692,100) (692,100) (692,100) (692,100) (692,100) Depreciation (244,000) (244,000) (244,000) (244,000) (244,000) Taxable Income 962,493 962,493 962,493 962,493 962,493 Tax @30% (288,748) (288,748) (288,748) (288,748) (288,748) Net Income 673,745 673,745 673,745 673,745 673,745 Add Back depreciation 244,000 244,000 244,000 244,000 244,000 Net Cash flows (1,220,000) 917,745 917,745 917,745 917,745 917,745 PV factor @10% 1 0.9091 0.8264 0.7513 0.6830 0.6209 PV of net Cash flows (1,220,000) 834,314 758,467 689,515 626,832 569,847 NPV = $ 2,258,975.58 Worst Case NPV Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment (1,220,000) Annual Contribution 646,880.85 646,880.85 646,880.85 646,880.85 646,880.85 Annual Fixed cost (845,900) (845,900) (845,900) (845,900) (845,900) Depreciation (244,000) (244,000) (244,000) (244,000) (244,000) Taxable Income (443,019) (443,019) (443,019) (443,019) (443,019) Tax @30% 132,906 132,906 132,906 132,906 132,906 Net Income (310,113) (310,113) (310,113) (310,113) (310,113) Add Back depreciation 244,000 244,000 244,000 244,000 244,000 Net Cash flows (1,220,000) (66,113) (66,113) (66,113) (66,113) (66,113) PV factor @10% 1 0.9091 0.8264 0.7513 0.6830 0.6209 PV of net Cash flows (1,220,000) (60,103) (54,639) (49,672) (45,156) (41,051) NPV = $ (1,470,621.8)
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