1 ptsSkip to question text. We are evaluating a project that costs $1096672, has
ID: 2748865 • Letter: 1
Question
1 ptsSkip to question text.
We are evaluating a project that costs $1096672, has a seven-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 43634 units per year. Price per unit is $47, variable cost per unit is $22, and fixed costs are $825992 per year. The tax rate is 39 percent, and we require a 11 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-10 percent. What is the NPV of the project in worst-case scenario? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)
Explanation / Answer
Worst Case NPV:
Initial Investment = 1096672
Sales Unit = 43634*(1-10%) = 39,270.60
Sale Price = 47*(1-10%) = $ 42.30
variable cost per unit = 22*(1+10%) = 24.20
Fixed Cost = 825992*(1-10%) = $ 743,392.80
Annual Depreciation = Initial Investment/Useful life
Annual Depreciation = 1096672/7
Annual Depreciation = $ 156667.43
Annual Cash Flow= ((sale price - Variable cost)*Sale Unit-Fixed Cost) * (1-tax rate) + Annual Depreciation * tax rate
Annual Cash Flow= ((42.30-24.20)*39270.60 - 743392.80)*(1-39%) + 156667.43*39%
Annual Cash Flow= 41,217.38
NPV of the project in worst-case scenario = - Initial Investment + Annual Cash Flow*(1-(1+r)^-n )/r
NPV of the project in worst-case scenario = -1096672 + 41217.38*(1-(1+11%)^-7)/11%
NPV of the project in worst-case scenario = - 902448
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