The Can-Do Co. is analysing a proposed project. The company expects to sell 12,0

Question

The Can-Do Co. is analysing a proposed project. The company expects to sell 12,000 units, plus or minus 4 percent. The expected variable cost per unit is $7 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6 percent range. The depreciation expense is $30,000 per year, over the 5 year life of the project, using the straight line. The tax rate is 34 percent. The sale price is estimated at $14 a unit, plus or minus 5 percent.

What is the NPV under the base case scenario if required rate of return is 12%?

Explanation / Answer

Variables under base case scenario:

1. Units sold = 12000 units

2. Variable cost p.u. = $7

3. Fixed cost = $36000

4. Depreciation expense = $30000

5. SP per unit = $14

6. Cash flows per year = [(SP-VC) x No. of units sold - FC] x (1-tax rate) + [Depreciation x Tax rate]

= [(14-7) x 12000 - 36000] x (1-0.34) + [30000 x 0.34]

= 31680 + 10200

= $41880

7. NPV = 41880 x Cumulative PVF@12% for 5 years

= 41880 x 3.6047....

= $150968.03

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