We are evaluating a project that costs $969,000, has an fourteen-year life, and has no salvage...

We are evaluating a project that costs $969,000, has an fourteen-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 157,000 units per year. Price per unit is $41, variable cost per unit is $23, and fixed costs are $984,504 per year. The tax rate is 37 percent, and we require a 12 percent return on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 16 percent.

Solutions

Expert Solution

Here, to evaluate the profitability of the project, we calculate the Net Present value (NPV) as shown in the table below:

Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14
Initial Cost	-969000
Sales Revenue		6437000.00	6437000.00	6437000.00	6437000.00	6437000.00	6437000.00	6437000.00	6437000.00	6437000.00	6437000.00	6437000.00	6437000.00	6437000.00	6437000.0000
Varibale cost		-3611000.00	-3611000.00	-3611000.00	-3611000.00	-3611000.00	-3611000.00	-3611000.00	-3611000.00	-3611000.00	-3611000.00	-3611000.00	-3611000.00	-3611000.00	-3611000.00
Fixed Costs		-984504.00	-984504.00	-984504.00	-984504.00	-984504.00	-984504.00	-984504.00	-984504.00	-984504.00	-984504.00	-984504.00	-984504.00	-984504.00	-984504.00
Depreciation		-69214.29	-69214.29	-69214.29	-69214.29	-69214.29	-69214.29	-69214.29	-69214.29	-69214.29	-69214.29	-69214.29	-69214.29	-69214.29	-69214.29
Profit before tax		1772281.71	1772281.71	1772281.71	1772281.71	1772281.71	1772281.71	1772281.71	1772281.71	1772281.71	1772281.71	1772281.71	1772281.71	1772281.71	1772281.71
Taxes at 37%		-655744.23	-655744.23	-655744.23	-655744.23	-655744.23	-655744.23	-655744.23	-655744.23	-655744.23	-655744.23	-655744.23	-655744.23	-655744.23	-655744.23
Profit after tax		1116537.48	1116537.48	1116537.48	1116537.48	1116537.48	1116537.48	1116537.48	1116537.48	1116537.48	1116537.48	1116537.48	1116537.48	1116537.48	1116537.48
Add back depreciation		69214.29	69214.29	69214.29	69214.29	69214.29	69214.29	69214.29	69214.29	69214.29	69214.29	69214.29	69214.29	69214.29	69214.29
Net Cash flow	-969000	1185751.77	1185751.77	1185751.77	1185751.77	1185751.77	1185751.77	1185751.77	1185751.77	1185751.77	1185751.77	1185751.77	1185751.77	1185751.77	1185751.77
NPV at 12%	$ 6,071,637.23

Since the NPV of the project at 12% is positive, the project is profitable and we should accept this project

jeff jeffy answered 1 year ago

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