Question

We are evaluating a project that costs $681,103, 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 43,456 units per year. Price per unit is $46, variable cost per unit is $28, and fixed costs are $521,866 per year. The tax rate is 30%, and we require a return of 20% on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent.

What is the Best Case NPV? (Round answer to 2 decimal places. Do not round intermediate calculations)

Answer 1

Best case NPV is NPV at better statge.

At Best case, Rev will be considered at 110% and Cost will be considered at 90%.

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 = [ COst - Salvage Value ] / Life

= [ $ 681103 - $ 0 ] / 5

= 681103 / 5

= $ 136220.60

Cash flow calculation:

Partciculars	Cash flow	Working
Sales	$   2,198,873.60	43456*1.1*46
Variable Cost	$   1,204,600.32	43456*1.1*28*0.9
Fixed cost	$      469,679.40	521866*0.9
Dep	$      136,220.60	Calculated
PBT	$      388,373.28	2198873.60-1204600.32-469679.40-136220.60
Tax @30%	$      116,511.98	388373.28*0.3
PAT	$      271,861.30	388373.28-116511.98
Cash flow	$      408,081.90	271861.30+136220.60

Cash flow = PAT + Dep

NPV:

Year	Cash Flow	PVF @20 %	Disc CF
0	$            -681,103.00	1.0000	$           -681,103.00
1 - 5	$              408,081.90	2.9906	$         1,220,414.68
NPV			$            539,311.68

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