Question

A project under consideration costs $600,000, has a five-year life and has no salvage value. Depreciation is straight-line to zero. The firm has made the following projections related to this project: Base Case Lower Bound Upper Bound Unit Sales 3,000 2,850 3,150 Price Per Unit $300 $285 $315 Variable Cost Per Unit $170 $160 $180 Fixed Costs $150,000 $135,000 $165,000 The required return is 16 percent and the tax rate is 40 percent. No additional investment in net working capital is required.

Requirement 1:

What are the worst-case and best-case scenarios for this project? (Input unit sales as number of units. Round all other answers to the nearest whole dollar (e.g., 32).)

	Worst Case	Best Case
Unit Sales
Price Per Unit	$	$
Variable Cost Per Unit	$	$
Fixed Costs	$	$

Requirement 2:

Your analysis of the project's NPV in the "base case" shows a NPV of $28,664. However, your boss has asked you to determine the sensitivity of the project's NPV to potential changes in fixed costs. Using the firm's estimate of the highest possible level of fixed costs, complete the table below and use your results to assess the sensitivity of the project's NPV to changes in fixed costs. (Round all answers except your sensitivity estimate to the nearest whole dollar (e.g., 32). Round the sensitivity estimate to 2 decimal places (e.g., 32.16). Negative amounts should be indicated by a minus sign.)

Sales	$
Variable Costs	$
Fixed Costs	$
Depreciation	$
EBIT	$
Taxes	$
Net Income	$
Operating Cash Flow	$
Net Present Value (NPV)	$

Sensitivity (ΔNPV/ΔFC)

$

Answer 1

Requirement 1:  

	Worst Case	Best Case
Unit Sales	2,850	3,150
Price Per Unit	$285	$315
Variable Cost Per Unit	$180	$160
Fixed Costs	$165,000	$135,000

Requirement 2:

The NPV is calculated as :

• Operating cash flow (OCF) of each year = income after tax + depreciation
• NPV is calculated using NPV function in Excel as shown below :

The base case NPV is calculated as below :

The NPV with fixed costs of $165,000 is calculated as below :

Sales	$900,000
Variable Costs	$510,000
Fixed Costs	$165,000
Depreciation	$120,000
EBIT	$105,000
Taxes	$42,000
Net Income	$63,000
Operating Cash Flow	$183,000
Net Present Value (NPV)	-$804

  Sensitivity = (ΔNPV/ΔFC) = ( $28,664 - (-$804)) / ($165,000 - $150,000) = 1.96