Question

We are evaluating a project that costs $912,000, has an thirteen-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 147,000 units per year. Price per unit is $36, variable cost per unit is $29, and fixed costs are $921,120 per year. The tax rate is 33 percent, and we require a 18 percent return on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 14 percent. (a) Calculate the best-case NPV. (b) Calculate the worst-case NPV.

Please use Excel and show formulas. Thanks.

Answer 1

(a)  the best-case NPV is $146,405.20.

In best-case NPV, projections given for price, quantity, variable costs, and fixed costs will be increased by 14%.

best-case price = base case price*(1+rate of increase) = $36*(1+0.14) = $36*1.14 = $41.04

best-case quantity = 147,000*1.14 = 167,580

best-case variable costs = $29*1.14 = $33.06

best-case Fixed costs = $921,120*1.14 = $1,050,076.8

Formulas

(b) the worst-case NPV is -$900,689.20.

In worst-case NPV, projections given for price, quantity, variable costs, and fixed costs will be decreased by 14%.

worst-case price = base case price*(1-rate of decrease) = $36*(1-0.14) = $36*0.86 = $30.96

best-case quantity = 147,000*086 = 126,420

best-case variable costs = $29*0.86 = $24.94

best-case Fixed costs = $921,120*0.86 = $792,163

Formulas