We are evaluating a project that costs $1,180,000, has a ten-year life, and has
ID: 2769622 • Letter: W
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.)
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
Depreciation under staright line method = (Cost - salvage value) / useful life = (1180000 - 0) / 10 = $118000 per year Calculation of Net cash flow from operations under best case as well as worst case Noemal sales in units = 66000 units Best case Worst case Sales in units 72600 59400 Sales ($45 per unit * no.of units) $32,67,000 $26,73,000 Less : Variable cost ($25 per unit * no.of units) $18,15,000 $14,85,000 Contribution margin $14,52,000 $11,88,000 Less Fixed cost $7,50,000 $7,50,000 Less Depreciation $1,18,000 $1,18,000 Profit before tax $5,84,000 $3,20,000 Less Tax @ 35% $2,04,400 $1,12,000 Profit after tax $3,79,600 $2,08,000 (+) Depreciation $1,18,000 $1,18,000 Cash flow from operations $4,97,600 $3,26,000 Calculation of NPV under both scenario at discount rate of 15% which is the required rate of return Best Case Worst case Year PV Factor @ 15% Cash flow Present value Cash flow Present value 0 1 -$11,80,000.00 -$11,80,000.00 -$11,80,000.00 -$11,80,000.00 1 0.869565217 $4,97,600.00 $4,32,695.65 $3,26,000.00 $2,83,478.26 2 0.756143667 $4,97,600.00 $3,76,257.09 $3,26,000.00 $2,46,502.84 3 0.657516232 $4,97,600.00 $3,27,180.08 $3,26,000.00 $2,14,350.29 4 0.571753246 $4,97,600.00 $2,84,504.42 $3,26,000.00 $1,86,391.56 5 0.497176735 $4,97,600.00 $2,47,395.14 $3,26,000.00 $1,62,079.62 6 0.432327596 $4,97,600.00 $2,15,126.21 $3,26,000.00 $1,40,938.80 7 0.37593704 $4,97,600.00 $1,87,066.27 $3,26,000.00 $1,22,555.48 8 0.326901774 $4,97,600.00 $1,62,666.32 $3,26,000.00 $1,06,569.98 9 0.284262412 $4,97,600.00 $1,41,448.98 $3,26,000.00 $92,669.55 10 0.247184706 $4,97,600.00 $1,22,999.11 $3,26,000.00 $80,582.21 Net Present Value $13,17,339.27 $4,56,118.57 NPV Best Case $13,17,339.27 Worst Case $4,56,118.57
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