Question

Norister Inc. is considering introducing a new product line. This will require the purchase of new fixed assets of $2.4 million. The company estimates that demand for the new product will be approximately 15,000 units per year, with a price per unit of $100. The variable cost of producing each unit of the product is $35, and fixed costs per year will be $100,000. Demand for the product will remain constant for six years, after which both demand and production will cease, and the associated fixed assets will have no salvage value. Depreciation on the fixed assets will be straight-line to zero. The company’s marginal tax rate is 35%, and the required return on the project is 13%. How will the after-tax operating cash flow (ATOCF) change if the number of units sold is 10% less than the projected demand of 15,000 units?

Select one:

a. ATOCF will increase by 10%.

b. ATOCF will decrease by 10%.

c. ATOCF will increase by 8.94%.

d. ATOCF will decrease by 8.94%.

e. ATOCF will remain unchanged.

Norister Inc. is considering introducing a new product line. This will require the purchase of new fixed assets of $2.4 million. The company estimates that demand for the new product will be approximately 15,000 units per year, with a price per unit of $100. The variable cost of producing each unit of the product is $35, and fixed costs per year will be $100,000. Demand for the product will remain constant for six years, after which both demand and production will cease, and the associated fixed assets will have no salvage value. Depreciation on the fixed assets will be straight-line to zero. The company’s marginal tax rate is 35%, and the required return on the project is 13%. Due to forecasting risk, the company estimates that price per unit, variable cost, fixed costs, and quantity sold could vary by ±10%, ±15%, ±5%, and ±10%, respectively. What is the project’s net present value in the worst case scenario?

Select one:

a. -$656,606

b. -$543,413

c. -$368,020

d. -$103,677

e. $43,502

Answer 1

1)

2)

In the worst case scenario, the sales will be less than the estimated and the costs will be more than the estimated amounts.

Price per unit = $100 - 10% = $90

Variable cost per unit = $35 + 15% = $40.25

Fxed costs = $100,000 + 5% = $105,000

Quantity sold = 15,000 - 10% = 13,500