We are evaluating a project that costs $106,559, has a seven-year life, and has no salvage...

We are evaluating a project that costs $106,559, 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 4,308 units per year. Price per unit is $47, variable cost per unit is $29, and fixed costs are $82,563 per year. The tax rate is 40 percent, and we require a 11 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

Time line		0	1	2	3	4	5	6	7



Cost of new machine		-106559

=Initial Investment outlay		-106559

										100.00%
Unit sales			43120	43120	43120	43120	43120	43120	43120
Profits	=no. of units sold * (sales price - variable cost)		448448	448448	448448	448448	448448	448448	448448
Fixed cost			-560000	-560000	-560000	-560000	-560000	-560000	-560000

-Depreciation	Cost of equipment/no. of years		-15222.7143	-15222.7143	-15222.7143	-15222.71	-15222.71	-15222.71	-15222.7143	-1.46E-11	=Salvage Value

=Pretax cash flows			-126774.714	-126774.714	-126774.714	-126774.7	-126774.7	-126774.7	-126774.714
-taxes	=(Pretax cash flows)*(1-tax)		-76064.8286	-76064.8286	-76064.8286	-76064.83	-76064.83	-76064.83	-76064.8286
+Depreciation			15222.71429	15222.71429	15222.71429	15222.714	15222.714	15222.714	15222.71429
=after tax operating cash flow			-60842	-60842	-60842	-60842	-60842	-60842	-60842





+Tax shield on salvage book value	=Salvage value * tax rate								-5.8208E-12
=Terminal year after tax cash flows									0

Total Cash flow for the period		-106559	-60842	-60842	-60842	-60842	-60842	-60842	-60842
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631	1.5180704	1.6850582	1.8704146	2.076160153
Discounted CF=	Cashflow/discount factor	-106559	-54812.6126	-49380.7321	-44487.146	-40078.51	-36106.77	-32528.62	-29305.061
NPV=	Sum of discounted CF=	-393258.00

jeff jeffy answered 1 month ago

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