We are evaluating a project that costs $520,000, has a six-year life, and has no

Question

We are evaluating a project that costs $520,000, has a six-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 65,000 units per year. Price per unit is $45, variable cost per unit is $30, and fixed costs are $840,000 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. (Negative amounts 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.)

  

We are evaluating a project that costs $520,000, has a six-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 65,000 units per year. Price per unit is $45, variable cost per unit is $30, and fixed costs are $840,000 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.

Explanation / Answer

(1) NPVs in case of variation in Selling Price

(2) NPVs in case of variation in quantity:   

(3) NPVs in case of variation in Variable Cost

(All figures in $, except sales unit) Computaton of NPV (1)Variation in Selling Price Present case (+)10% (-)10% a Sales in units             65,000.00              65,000.00               65,000.00 b Selling Price per unit                     45.00                       49.50                       40.50 c Sales Value ( a x b)       2,925,000.00        3,217,500.00         2,632,500.00 d Variable Cost $30 x a     (1,950,000.00)      (1,950,000.00)       (1,950,000.00) e Contribution Margin ( c -d )           975,000.00        1,267,500.00             682,500.00 f Fixed Cost -840,000.00 -840,000.00 -840,000.00 g Depreciation $520,000/6 yrs           (86,666.67)            (86,666.67)             (86,666.67) h EBT /(loss) (e -f-g)             48,333.33            340,833.33          (244,166.67) i Tax 35% of EBT           (16,916.67)          (119,291.67) j EAT/(loss)             31,416.67            221,541.67          (244,166.67) k Add back of depreciation fund $520,000/6 yrs             86,666.67              86,666.67               86,666.67 l Free Cash Flow per year (j + k)           118,083.33            308,208.33          (157,500.00) m Discounted Free Cash Flow l x PVIFA10%,6y           514,252.92        1,342,247.29          (685,912.50) n Initial Cost           520,000.00            520,000.00             520,000.00 o NPV ( m - n)             (5,747.08)            822,247.29       (1,205,912.50) Variation in Selling Price NPV ($) NPV in Best Case 822247.29 NPV in worst case -1205912.50

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