Question

Sabre is considering opening a new online storefront to support the launch of their 'Pyramid' tablet. The severs required to support the store will cost $622,000, are expected to have a five year life, and have no salvage value; depreciation is straight-line to zero. There are no expected NWC requirements.

Sales are projected at 14,000 units per year, price per unit will be $255.00, variable cost per unit will be $186.00, and fixed costs will be $200,000 per year. The required return is 11 percent and the relevant tax rate is 34 percent.

Based on your experience, you think the unit sales price and quantity, variable cost, and fixed cost projections given here are probably accurate to within +/- 9 percent. What is the worst case NPV? Round your answer to the nearest dollar.

Answer 1

Worst case NPV
	Normal case		Worst case
Quantity	14000	14000*(1-.09)	12740
selling price per unit	255	255*(1-.09)	232.05
Variable cost per unit	186	186*(1+.09)	202.74
fixed cost	200000	200000*(1+.09)	218000
Year	0	1	2	3	4	5
Initial investment	-622000
sales revenue = quantity sold*selling price		2956317	2956317	2956317	2956317	2956317
variable cost= quantity*variable cost		2582908	2582908	2582908	2582908	2582908
fixed cost		218000	218000	218000	218000	218000
Annual depreciation		124400	124400	124400	124400	124400
operating profit		31009.4	31009.4	31009.4	31009.4	31009.4
tax rate -34%		10543.2	10543.2	10543.2	10543.2	10543.2
after tax profit		20466.2	20466.2	20466.2	20466.2	20466.2
add annual depreciation		124400	124400	124400	124400	124400
net operating cash flow	-622000	144866.2	144866.2	144866.2	144866.2	144866.2
present value factor at 11% =1/(1+r)^n r =11%	1	0.900901	0.811622	0.731191	0.658731	0.593451
present value of net operating cash flow = net operating cash flow*present value factor at 11%	-622000	130510.1	117576.7	105924.9	95427.86	85971.04
NPV =sum of present value of cash flow	-86589.4
Worst case NPV	-86589