Question

We are evaluating a project that costs $500,000, 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 50,000 units per year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $600,000 per year. The tax rate is 22 percent, and we require a return of 12 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

NPV for Best case is calculated as follows:

In Best case, costs will decrease by 10% and price, quantity will increase by 10%

So NPV is $2,633,239.43

Worst case

In worst case, costs will increase by 10% and price, quantity will decrease by 10%

So NPV is  $-931,538.87