We are evaluating a project that costs $110934, has a seven-year life, and has no salvage...

We are evaluating a project that costs $110934, 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 4139 units per year. Price per unit is $51, variable cost per unit is $21, and fixed costs are $81850 per year. The tax rate is 36 percent, and we require a 9 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-12 percent. What is the NPV of the project in worst-case scenario?

Expert Solution

	0	1	2	3	4	5	6	7
Investment	-$110,934.00
Sales		$163,467.32	$163,467.32	$163,467.32	$163,467.32	$163,467.32	$163,467.32	$163,467.32
VC		-$85,667.37	-$85,667.37	-$85,667.37	-$85,667.37	-$85,667.37	-$85,667.37	-$85,667.37
FC		-$91,672.00	-$91,672.00	-$91,672.00	-$91,672.00	-$91,672.00	-$91,672.00	-$91,672.00
Depreciation		-$15,847.71	-$15,847.71	-$15,847.71	-$15,847.71	-$15,847.71	-$15,847.71	-$15,847.71
EBT		-$29,719.76	-$29,719.76	-$29,719.76	-$29,719.76	-$29,719.76	-$29,719.76	-$29,719.76
Tax (36%)		$10,699.11	$10,699.11	$10,699.11	$10,699.11	$10,699.11	$10,699.11	$10,699.11
Profits		-$19,020.65	-$19,020.65	-$19,020.65	-$19,020.65	-$19,020.65	-$19,020.65	-$19,020.65
Cash Flows	-$110,934.00	-$3,172.93	-$3,172.93	-$3,172.93	-$3,172.93	-$3,172.93	-$3,172.93	-$3,172.93
NPV	-$126,903.21

In worst-case scenario, sales are lower and costs are higher

Quantity = 4139 x (1 - 12%) = 3,642.32

Price = 51 x (1 - 12%) = 44.88

VC = 21 x (1 + 12%) = 23.52

Fixed Cost (FC) = 81,850 x (1 + 12%) = 91,672

Depreciation = Investment / 7

Cash Flows = Investment + Profits + Depreciation

jeff jeffy answered 8 months ago

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