Question

We are evaluating a project that costs $714,400, has an eight-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 90,000 units per year. Price per unit is $51, variable cost per unit is $36, and fixed costs are $745,000 per year. The tax rate is 25 percent, and we require a return of 11 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. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

best case :

In the best case, price will be higher, quantity will be higher, variable cost lower and fixed cost lower

quantity = 90,000 * (1 + 10%) = 99,000

price = $51 * (1 + 10%) = $56.10

variable cost = $36 * (1 - 10%) = $32.40

fixed cost = $745,000 * (1 - 10%) = $670,500

operating cash flow (OCF of each year) = net income + depreciation

annual depreciation = project cost / project life = $714,400 / 8

NPV is calculated using NPV function in Excel. NPV is $4,013,299

worst case :

In the worst case, price will be lower, quantity will be lower, variable cost higher and fixed cost higher

quantity = 90,000 * (1 - 10%) = 81,000

price = $51 * (1 - 10%) = $45.90

variable cost = $36 * (1 + 10%) = $39.60

fixed cost = $745,000 * (1 + 10%) = $819,500

operating cash flow (OCF of each year) = net income + depreciation

annual depreciation = project cost / project life = $714,400 / 8

NPV is calculated using NPV function in Excel. NPV is -$1,488,968