We are evaluating a project that costs $1126316, has a seven-year life, and has

Question

We are evaluating a project that costs $1126316, 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 41686 units per year. Price per unit is $51, variable cost per unit is $22, and fixed costs are $830574 per year. The tax rate is 33 percent, and we require a 8 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-7 percent. What is the NPV of the project in worst-case scenario?

Explanation / Answer

Worst Case cost of capital = 8+7 = 15%

NPV @ 15% = [(51-22)*41686 - 830574] (1-0.33) + (160902*0.33)     -     1126316

= 253474 + 53098 - 1126316

= -$819744

NPV of the project in worst-case scenario = -$819744

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