Question

We are evaluating a project that costs $680,000, has a five-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 49,000 units per year. Price per unit is $46, variable cost per unit is $26, and fixed costs are $685,000 per year. The tax rate is 24 percent, and we require a return of 20 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

Price and quantity are increased by 10%.

Variable and fixed costs are decreased by 10%.

Operating cash flow (OCF) each year = income after tax + depreciation

NPV is calculated using NPV function in Excel

NPV is $1,348,594.42

worst case

Price and quantity are decreased by 10%.

Variable and fixed costs are increased by 10%.

Operating cash flow (OCF) each year = income after tax + depreciation

NPV is calculated using NPV function in Excel

NPV is -$1,012,003.40