We are evaluating a project that costs $831,000, has an nine-year life, and has

Question

We are evaluating a project that costs $831,000, has an nine-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 100,000 units per year. Price per unit is $37, variable cost per unit is $21, and fixed costs are $832,662 per year. The tax rate is 33 percent, and we require a 14 percent return on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 20 percent.

Calculate the Best and worst case NPV.

please show your work on excel so I can understand. Thank You!

We are evaluating a project that costs $831,000, has an nine-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 100,000 units per year. Price per unit is $37, variable cost per unit is $21, and fixed costs are $832,662 per year. The tax rate is 33 percent, and we require a 14 percent return on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 20 percent.

Calculate the Best and worst case NPV.

please show your work on excel so I can understand. Thank You!

Explanation / Answer

Answer Calculation of Best case NPV of the project (Sales units and sales price per unit are 20% higher) Year 0 Year 1-9 NPV Sales units              120,000 Sales    ($44.40 per unit) $5,328,000 - Variable costs ($21 per unit) -$2,520,000 - Fixed Cost -$832,662 - Depreciation -$92,333 = EBIT $1,883,005 - Taxes @ 33% -$621,392 = Profit after tax $1,261,613 + Depreciation $92,333 - Capital expenditure -$831,000 = Net Cash flow -$831,000 $1,353,946 Annuity factor @ 14%         1.00000              4.94637 Present Values -$831,000 $6,697,120 $5,866,120 Calculation of Worst case NPV of the project (Sales units and sales price per unit are 20% lower) Year 0 Year 1-9 NPV Sales units                 80,000 Sales    ($29.60 per unit) $2,368,000 - Variable costs ($21 per unit) -$1,680,000 - Fixed Cost -$832,662 - Depreciation -$92,333 = EBIT -$236,995 - Taxes @ 33% $78,208 = Profit after tax -$158,787 + Depreciation $92,333 - Capital expenditure -$831,000 = Net Cash flow -$831,000 -$66,454 Annuity factor @ 14%         1.00000              4.94637 Present Values -$831,000 -$328,704 -$1,159,704

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