We are evaluating a project that costs $837,367, has aneight-year life, and has no salvage...

We are evaluating a project that costs $837,367, 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 61,080 units per year. Price per unit is $39, variable cost per unit is $18, and fixed costs are $419,261 per year. The tax rate is 35%, and we require a return of 21% on this project.

In dollar terms, what is the sensitivity of NPV to changes in the units sold projection? (Round answer to 2 decimal places. Do not round intermediate calculations)

Expert Solution

NPV :
NPV is the difference between Present value of Cash Inflows and Present value of cash outflows.

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Dep per anum = [ Cost - Salvage Value ] / Useful Life

= [ $ 837367 - $ 0 ] / 8

= $ 837367 / 8

= $ 104670.88

Cash flow per anum :

Partciculars	Cash flow	Working
Sales	$ 2,382,120.00	61080*39
Variable Cost	$ 1,099,440.00	61080*18
Fixed cost	$ 419,261.00	Given
Dep	$ 104,670.88	Calculated
PBT	$ 758,748.12	2382120-1099440-419261-104670.88
Tax @35%	$ 265,561.84	758748.12*0.35
PAT	$ 493,186.28	758748.12-265561.84
Cash flow	$ 597,857.16	493186.28+104670.88

Cash flow = PAT + Dep

NPV:

Year	Cash Flow	PVF @21 %	Disc CF
0	$ -837,367.00	1.0000	$ -837,367.00
1 - 8	$ 597,857.16	3.7256	$ 2,227,362.01
NPV			$ 1,389,995.01

PVAF = SUm [ PVF(r%, n) ]
PVF(r%, n) = 1 / ( 1 + r)^n
r = Int rate per period
n = No. of periods

How to calculate PVAF using Excel:
=PV(Rate,NPER,-1)
Rate = Disc Rate
NPER = No.of periods

jeff jeffy answered 2 years ago

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