Question

The most likely outcomes for a particular project are estimated as follows:

Unit price:	$	60
Variable cost:	$	40
Fixed cost:	$	250,000
Expected sales:		30,000	units per year

However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.2 million, which will be depreciated straight-line over the project life to a final value of zero. The firm’s tax rate is 40% and the required rate of return is 10%.

a. What is project NPV in the best-case scenario, that is, assuming all variables take on the best possible value? (A negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

b. What is project NPV in the worst-case scenario? (A negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

Answer 1

Tax rate	40%
	Base Case	Best Case	Worst Case
Units	30,000	33,000	27,000
Sale price	60	66	54
Variable cost	40	36	44
Sale	1,800,000	2,178,000	1,458,000
Less: Operating Cost	1,200,000	1,188,000	1,188,000
Contribution	600,000	990,000	270,000
Less: Fixed Cost	250,000	225,000	275,000
Less: Depreciation 1200000/10	120,000	120,000	120,000
Profit before tax	230,000	645,000	(125,000)
Tax	92,000	258,000	(50,000)
Profit After Tax	138,000	387,000	(75,000)
Add Depreciation	120,000	120,000	120,000
Cash Profit After tax	258,000	507,000	45,000
Years	Best case cash flow	Worst case cash flows	PV factor @ 10%	PV-Best	PV-Worst
0	(1,200,000)	(1,200,000)	1.000	(1,200,000)	(1,200,000)
1	507,000	45,000	0.909	460,909	40,909
2	507,000	45,000	0.826	419,008	37,190
3	507,000	45,000	0.751	380,917	33,809
4	507,000	45,000	0.683	346,288	30,736
5	507,000	45,000	0.621	314,807	27,941
6	507,000	45,000	0.564	286,188	25,401
7	507,000	45,000	0.513	260,171	23,092
8	507,000	45,000	0.467	236,519	20,993
9	507,000	45,000	0.424	215,017	19,084
10	507,000	45,000	0.386	195,470	17,349
			NPV	1,915,296	(923,494)