4.We are evaluating a project that costs $1122178, has a seven-year life, and ha
ID: 2764165 • Letter: 4
Question
4.We are evaluating a project that costs $1122178, 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 41757 units per year. Price per unit is $45, variable cost per unit is $25, and fixed costs are $826625 per year. The tax rate is 35 percent, and we require a 13 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-10 percent. What is the NPV of the project in worst-case scenario? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)
Explanation / Answer
Calculation of Cashflows after Tax:
Depreciation per year= (Initial Cost -Salvage Value)/Life of the Project
= (1,122,178-0)/7
= $160,311
Net Cash Inflows per Year=
Sales-Variable cost-Fixed Cost
=41,757(45-25)-$826,625
=$ 8515
Cashflow after Depreciation =$8515-$160,311=$(151796)
Net profit after Tax = $(151796)-$(151796)*0.35=151796-53129 =$(98,667)
Net Cashflow after adding Depreciation = (98,667)+160311 =$61,643
Cumulative discounted factor for 7 Years =
0.884956+0.783147+0.69305+0.613319+0.54276+0.480319+0.425061 =4.42261
Cashflows for 7 years=4.42261* $61,643 = $ 272,626
Cash inflow before Depreciation= $ 8,515*0.9 = $7,664
Cash inflow after Depreciation = 7,664-160,311 =$ (152,648)
Cashflow after Tax effect= (152,648)-(152,648)*0.35 = $ (99,220)
Cash flow after adding back the Depreciation
=$ (99,220)+160311=$61,090
Cash flow for 7 years =$61090*4.42261= $ 270,178
0.884956+0.783147+0.69305+0.613319+0.54276+0.480319+0.425061 =4.42261
Cashflows for 7 years=4.42261* $61,643 = $ 272,626
NPV of the project in Worst case :Cash inflow before Depreciation= $ 8,515*0.9 = $7,664
Cash inflow after Depreciation = 7,664-160,311 =$ (152,648)
Cashflow after Tax effect= (152,648)-(152,648)*0.35 = $ (99,220)
Cash flow after adding back the Depreciation
=$ (99,220)+160311=$61,090
Cash flow for 7 years =$61090*4.42261= $ 270,178
(Depreciation added back because it is non cash item but should be consider for Tax calculation)Related Questions
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