The Meldrum Co. is analyzing a proposed project. The company expects to sell 3,0

Question

The Meldrum Co. is analyzing a proposed project. The company expects to sell 3,000 units, give or take 15 percent. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $4,000. The sale price is estimated at $18 a unit, give or take 2 percent. The project requires $24,000 of fixed assets which will be worthless when the project ends in six years. Also required is $6,500 of net working capital for the life of the project. The tax rate is 34 percent and the required rate of return is 12 percent. What is the net present value of the worst-case scenario?

Explanation / Answer

Net present value of the worst-case scenario is as follows:

Base Case Best Case Worst Case Sales Unit 3000 3450 2550 Variable Expense$ 8 7.6 8.4 ($8*.95) ($8*1.05) Fixed Cost$ 12,500 11875 13125 ($12,500*.95) ($12,500*1.05) Depreciation$ 4000 4000 4000 Sales Price$ 18 18.36 17.64 ($18*.102%) ($8*98%)

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