Question

we are evaluating a project that costs $690,000, has a five year life, and no salvage value. Assume that straightline to zero over the life of the project. sales are projected at 71,000 units per year. price per unit is $75, variable cost per unit is $38 and fixed costs are $790,000 per year. The tax rate is 35%, and we require a return of 15% on this project Calculate the best case and wore case npv figures

Answer 1

Answer

Existing Case

Selling price = $75

Variable Cost = $38

Units	71000
Sales	5,325,000
Variable Cost	2,698,000
Fixed Cost	790,000
Depreciation	138,000
EBT	1,699,000
Tax @35%	594,650
Net income	1,104,350
Depreciation	138,000
Net Cash Flow	1,242,350

Year	Annual Cash Inflow	PVF @15%	PV
1	1,242,350	0.870	1,080,304.35
2	1,242,350	0.756	939,395.09
3	1,242,350	0.658	816,865.29
4	1,242,350	0.572	710,317.64
5	1,242,350	0.497	617,667.52
	Present Value of Cash Inflows		4,164,549.89

NPV = Present Value of Cash Inflows – Initial Cash Outflow

= 4,164,549.89 - $690,000

NPV (Existing) = $3,474,549

In Best and Worst case, the Units sold, Sale price, Variable Cost and Fixed Cost all are affected.

In Worst Case

In this the Sale price and Unit Decreases and Variable Cost and Fixed Cost increases.

So I am assuming 20% effect, i.e. 20% decrease in Sale Price and Units.

And, 20% Increase in Variable Cost and Fixed Cost.

New Sale Price = 75 – 20% = $60

New Variable Cost = 38 + 20% = $30.4

Units	56,800
Sales (56,800 * $60)	3,408,000.0
Variable Cost (56,800 * $38)	2,590,080.0
Fixed Cost	948,000.0
Depreciation (790,000 + 20%)	138,000.0
EBT	(268,080.0)
Tax @35%	(93,828.0)
Net income	(174,252.0)
Depreciation	138,000.0
Net Cash Flow	(36,252.0)

Year	Annual Cash Inflow	PVF @15%	PV
1	(36,252.0)	0.870	(31,523.48)
2	(36,252.0)	0.756	(27,411.72)
3	(36,252.0)	0.658	(23,836.28)
4	(36,252.0)	0.572	(20,727.20)
5	(36,252.0)	0.497	(18,023.65)
	Present Value of Cash Inflows		(121,522.33)

NPV = Present Value of Cash Inflows – Initial Cash Outflow

= (121,522.33) - $690,000

NPV (Worst) = ($811,522.33)

In Best Case

In this the Sale price and Unit Increases and Variable Cost and Fixed Cost Decreases.

So I am assuming 20% effect, i.e. 20% Increase in Sale Price and Units.

And, 20% Decrease in Variable Cost and Fixed Cost.

New Sale Price = 75 + 20% = $90

New Variable Cost = 38 - 20% = $30.4

Units	85,200
Sales(85,200 * $90)	7,668,000.0
Variable Cost (85,200 * $30.4)	2,590,080.0
Fixed Cost (790,000 – 20%)	632,000.0
Depreciation	138,000.0
EBT	4,307,920.0
Tax @35%	1,507,772.0
Net income	2,800,148.0
Depreciation	138,000.0
Net Cash Flow	2,938,148.0

Year	Annual Cash Inflow	PVF @15%	PV
1	2,938,148.0	0.870	2,554,911.30
2	2,938,148.0	0.756	2,221,662.00
3	2,938,148.0	0.658	1,931,880.00
4	2,938,148.0	0.572	1,679,895.66
5	2,938,148.0	0.497	1,460,778.83
	Present Value of Cash Inflows		9,849,127.80

NPV = Present Value of Cash Inflows – Initial Cash Outflow

= 9,849,127.80 - $690,000

NPV (Best) = $9,159,127.8