We are evaluating a project that cost $1,422,000, has six year life and has no s

Question

We are evaluating a project that cost $1,422,000, has six year life and has no salvage value. Assume that depreciation is straight line zero over the life of the project. Sales are projected at $88,200 units per year. Price per unit is $34.85, variable cost per unit is $21.10, and fixed costs are $762,000 per year. The tax rate is 35 percent, and we require a return of 11 percent on the 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

Calculation of Net cash flow from operating activity Base Case Best case (+ 10%) Worst Case (-10%) Sales (88200 units * $34.85) $30,73,770.00 Less : Variable cost $18,61,020.00 Less : Fixed cost $7,62,000.00 Less : Depreciation $2,37,000.00 Operating Income $2,13,750.00 $2,35,125.00 $1,92,375.00 Less : Tax @ 35% $74,812.50 $82,293.75 $67,331.25 Profit after tax $1,38,937.50 $1,52,831.25 $1,25,043.75 (+) Depreciation $2,37,000.00 $2,37,000.00 $2,37,000.00 Net cash flow from operating activity $3,75,937.50 $3,89,831.25 $3,62,043.75 Calculation of NPV Best Case Worst Case Year PV factor at 11% Cash Flow Present Value Cash Flow Present Value 0 1 -$14,22,000.00 -$14,22,000.00 -$14,22,000.00 -$14,22,000.00 1 0.900900901 $3,89,831.25 $3,51,199.32 $3,62,043.75 $3,26,165.54 2 0.811622433 $3,89,831.25 $3,16,395.79 $3,62,043.75 $2,93,842.83 3 0.731191381 $3,89,831.25 $2,85,041.25 $3,62,043.75 $2,64,723.27 4 0.658730974 $3,89,831.25 $2,56,793.92 $3,62,043.75 $2,38,489.43 5 0.593451328 $3,89,831.25 $2,31,345.87 $3,62,043.75 $2,14,855.34 6 0.534640836 $3,89,831.25 $2,08,419.71 $3,62,043.75 $1,93,563.37 NPV $2,27,195.86 $1,09,639.79

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