Question

we are evaluating a project that cost $690,000, has a five-yeqar life, and has no salvage value. assume that depreciation is straight line to zero over the project. sales are projected at $71000 units per year. prices per unit is $75, variable cost per unit $50 and fixed cost are $790000 per year. The tax rate is 35% and are are require a return of 15% on this project. suppose the projections given for price, quantity, variable cost, and fixed costs are all accurate to within = or - 10% what are the worse and best case npv

Answer 1

1)	BASE CASE:
	Sales units	71000
	Sales price per unit	$                 75.00
	Variable cost per unit	$                 50.00
	Fixed cost	$      790,000.00
	Initial project cost	$      690,000.00
	OCF:
	Sales revenue	$   5,325,000.00
	Variable cost	$   3,550,000.00
	Fixed cost	$      790,000.00
	Depreciation	$      138,000.00
	EBIT	$      847,000.00
	Tax at 35%	$      296,450.00
	NOPAT	$      550,550.00
	Add: Depreciation	$      138,000.00
	OCF	$      688,550.00
	PVIFA(15,5)	3.35216
	PV of OCF	$   2,308,126.39
	Initial project cost	$      690,000.00
	NPV	$   1,618,126.39
2)	BEST CASE:
	Sales units (71000*110%)	78100
	Sales price per unit (75*110%)	$                 82.50
	Variable cost per unit (50*90%)	$                 45.00
	Fixed cost (790000*90%)	$      711,000.00
	Initial project cost	$      690,000.00
	OCF:
	Sales revenue	$   6,443,250.00
	Variable cost	$   3,514,500.00
	Fixed cost	$      711,000.00
	Depreciation	$      138,000.00
	EBIT	$   2,079,750.00
	Tax at 35%	$      727,912.50
	NOPAT	$   1,351,837.50
	Add: Depreciation	$      138,000.00
	OCF	$   1,489,837.50
	PVIFA(15,5)	3.35216
	PV of OCF	$   4,994,166.37
	Initial project cost	$      690,000.00
	NPV	$   4,304,166.37
3)	WORST CASE:
	Sales units (71000*90%)	63900
	Sales price per unit (75*90%)	$                 67.50
	Variable cost per unit (50*110%)	$                 55.00
	Fixed cost (790000*110%)	$      869,000.00
	Initial project cost	$      690,000.00
	OCF:
	Sales revenue	$   4,313,250.00
	Variable cost	$   3,514,500.00
	Fixed cost	$      869,000.00
	Depreciation	$      138,000.00
	EBIT	$    (208,250.00)
	Tax at 35%	$      (72,887.50)
	NOPAT	$    (135,362.50)
	Add: Depreciation	$      138,000.00
	OCF	$           2,637.50
	PVIFA(15,5)	3.35216
	PV of OCF	$           8,841.31
	Initial project cost	$      690,000.00
	NPV	$    (681,158.69)