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In: Finance

We are evaluating a project that costs $1,675,000, has a six year life, and has no...

We are evaluating a project that costs $1,675,000, has a six year life, and has no salvage value. Assume that depreciation is straight line to zero over the life of the project. Sales are projected as 91,000 units per year, price is $35.95 per unit, variable cost is $21.4 per unit, fixed costs are $775,000 per year. Tax rate is 35% and discount rate is 11%.

1) calculate base-case profit, profit with a 100-unit increase or 100-unit decrease, and break-even units

2) how much is base-case NPV? What is changes on NPV with a 100-unit increase in sales?

Solutions

Expert Solution

1): Profit After Tax

  1. Base Case  $175,424.17
    UNITS 91000
    Price 3271450
    Variable 1947400
    Fixed 7,75,000
    Depreciation 279166.7
    Profit Before Tax 2,69,883
    Profit After Tax 175424.17
  2. 100-units increase => $176,369.92
    UNITS 91100
    Price 3275045
    Variable 1949540
    Fixed 7,75,000
    Depreciation 279166.7
    Profit Before Tax 2,71,338
    Profit After Tax 176369.92
  3. 100-units decrease => $174,478.42
    UNITS 90900
    Price 3267855
    Variable 1945260
    Fixed 7,75,000
    Depreciation 279166.7
    Profit Before Tax 2,68,428
    Profit After Tax 174478.42
  4. Break-even units = 72,452 (Use goal seek in excel)
    UNITS 72451.32
    Price 2604625
    Variable 1550458
    Fixed 7,75,000
    Depreciation 279166.7
    Profit Before Tax 0
    Profit After Tax 0.00

2): After adding depreciation back to profit after tax for cash flows, we get base-case NPV = $248,163.73

01-01-2021 -1675000
01-01-2022 454590.8333
01-01-2023 454590.8333
01-01-2024 454590.8333
01-01-2025 454590.8333
01-01-2026 454590.8333
01-01-2027 454590.8333
NPV @ 11% 2,48,163.73

100-units increase => NPV $252,164.76

01-01-2021 -1675000
01-01-2022 455536.5833
01-01-2023 455536.5833
01-01-2024 455536.5833
01-01-2025 455536.5833
01-01-2026 455536.5833
01-01-2027 455536.5833
NPV @ 11% 2,52,164.76

jeff jeffy answered 2 years ago
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