We are evaluating a project that costs $1,180,000, has a ten-year life, and has

Question

We are evaluating a project that costs $1,180,000, has a ten-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 66,000 units per year. Price per unit is $45, variable cost per unit is $25, and fixed costs are $750,000 per year. The tax rate is 35 percent, and we require a return of 15 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent.

Calculate the best-case and worst-case NPV figures. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Cost of project $ 1,180,000.00 Life of Project 10 yrs Depriciation $    118,000.00 Sale price 45 Variable Cost $              25.00 Fixed Cost 750000 Tax 35% Sales 66000 UNITS Cash flows Contribution/unit $              20.00 Total contribution $ 1,320,000.00 Depriciation $    118,000.00 Profit after depr. $ 1,202,000.00 Less:Fixed Costs 750000 Net $    452,000.00 Tax $    158,200.00 PAT $    293,800.00 Add: Depr*(1-tax) $       76,700.00 Cash flows $ 370,500.00 NPV $    986,450.62 Change NPV Sale price+10% $              2,115,285.42 Sale price(-10%) $               (142,384.18) Variable cost+10% $                 359,320.18 Variable cost-10% $              1,613,581.06 Fixed cost +10% $                 701,391.33 Fixed cost -10% $              1,271,509.91 Sale units+10% $              1,488,154.98 Sale units-10% $                 484,746.27

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