3.We are evaluating a project that costs $1109959, has a seven-year life, and ha

Question

3.We are evaluating a project that costs $1109959, 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 43795 units per year. Price per unit is $51, variable cost per unit is $29, and fixed costs are $817750 per year. The tax rate is 37 percent, and we require a 8 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-11 percent. What is the NPV of the project in best-case scenario? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Explanation / Answer

The following information given as per problem

The project cost is $1109959

The life of asset is 7 years and per year depreciation on straight line method is 1109959 / 7 is $158565.57

The sales per year is 43795 units @ $51

The variable cost is $29

The fixed cost is $817750

The tax rate is 37%

The cost of capital is 8%

The present value of $1 receivable annually for 7 years at 8% is 5.206

We will calculatye the NPV of project in 3 scenarios at normal projections ,-11% projections ,+11% projections

the net present value is positive 111888 when the projections are +11% is the best case scenario

Normal projections projections @ -11% projections @ +11% particulars sales unit rate amount sales unit rate amount sales unit rate amount cash inflow 43795 51 2233545 38977.55 45.39 1769191 48612.45 56.61 2751951 less depreciation 158565.6 158565.6 158565.6 variable cost 43795 29 1270055 38977.55 25.81 1006011 48612.45 32.19 1564835 fixed cost 817750 727797.5 907702.5 net profit -12825.6 -123183 120848 less- tax @37% 0 0 44713.74 net inflow /saving after tax -12825.6 -123183 76134.21 Add: depreciation 158565.6 158565.6 158565.6 Annual cash inflow 145740 35382.93 234699.8 Present value factor of cash flow for 7 years @ 8% 5.206 5.206 5.206 Present value of cash inflow 758722.4 184203.5 1221847 less - present value of cash outflow 1109959 1109959 1109959 net present value -351237 -925755 111888

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