We are evaluating a project that costs $1089458, has a seven-year life, and has

Question

We are evaluating a project that costs $1089458, 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 40651 units per year. Price per unit is $47, variable cost per unit is $27, and fixed costs are $818159 per year. The tax rate is 33 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?

Explanation / Answer

Price Per Unit =47*.90 42.3 Variable cost =27*1.10 29.7 Contrbution 12.6 No of Units sold 40651*.90 36585.9 Contribution 36585.9*12.6 460982 Fixed cost 818159*1.10 899974.9 Depreciation =1089458/7 155636.9 net profit -594629 TAX(Saving) -196227.7 Cash flow before depreciation adjustment -398401.3 ADD Depreciation 155636.9 Net Cash outflow -242764.4 PV factor 4.712196 Present Value of Cashflow -1143954 Cost Of machine -1089458 NPV of the project in worst-case scenario -2233412

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