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In: Finance

We are evaluating a project that costs $1,180,000, has a life of 10 years, and has...

We are evaluating a project that costs $1,180,000, has a life of 10 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 59,000 units per year. Price per unit is $45, variable cost per unit is $25, and fixed costs are $750,000 per year. The tax rate is 25 percent and we require a return of 14 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±15 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.)

Solutions

Expert Solution

Best case

Time line 0 1 2 3 4 5 6 7 8 9 10
Cost of new machine -1180000
=Initial Investment outlay -1180000
100.00%
Unit sales 67850 67850 67850 67850 67850 67850 67850 67850 67850 67850
Profits =no. of units sold * (sales price - variable cost) 2069425 2069425 2069425 2069425 2069425 2069425 2069425 2069425 2069425 2069425
Fixed cost -637500 -637500 -637500 -637500 -637500 -637500 -637500 -637500 -637500 -637500
-Depreciation Cost of equipment/no. of years -118000 -118000 -118000 -118000 -118000 -118000 -118000 -118000 -118000 -118000 0 =Salvage Value
=Pretax cash flows 1313925 1313925 1313925 1313925 1313925 1313925 1313925 1313925 1313925 1313925
-taxes =(Pretax cash flows)*(1-tax) 985443.75 985443.75 985443.75 985443.75 985443.75 985443.75 985443.75 985443.75 985443.8 985443.8
+Depreciation 118000 118000 118000 118000 118000 118000 118000 118000 118000 118000
=after tax operating cash flow 1103443.75 1103443.8 1103443.8 1103443.8 1103443.8 1103443.8 1103443.75 1103443.8 1103444 1103444
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -1180000 1103443.75 1103443.8 1103443.8 1103443.8 1103443.8 1103443.8 1103443.75 1103443.8 1103444 1103444
Discount factor= (1+discount rate)^corresponding period 1 1.14 1.2996 1.481544 1.6889602 1.9254146 2.1949726 2.502268791 2.8525864 3.251949 3.707221
Discounted CF= Cashflow/discount factor -1180000 967933.114 849064.14 744793.1 653327.28 573094.11 502714.13 440977.3058 386822.2 339317.7 297647.1
NPV= Sum of discounted CF= 4575690.21

Worst case

jeff jeffy answered 2 months ago
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