Question

We are evaluating a project that costs $884,000, has an eight-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 81,000 units per year. Price per unit is $59, variable cost per unit is $41, and fixed costs are $775,000 per year. The tax rate is 35%, and we require a 10% return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10%.

Calculate the best-case and worst-case NPV figures. (Omit $ sign in your response. Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final answers to 2 decimal places.)

Best-case NPV	$
Worst-case NPV	$

Answer 1

Tax rate		35%
Calculation of PV factors		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Year-8	Total
(PV factor, 1/(1+r)^time)		0.9091	0.8264	0.7513	0.6830	0.6209	0.5645	0.5132	0.4665	5.3349
Calculation of annual depreciation
Depreciation		Year-1-8
Cost		$       884,000
Dep Rate (1/8=12.5%)		12.50%
Annual Depreciation	Cost * Dep rate	$       110,500
Calculation of annual operating cash flow	Base case	Best case	Worst case
		Year-1-8	Year-1-8	Year-1-8
No of units		81,000	89,100	72,900.00
Selling price		59.00	64.90	53.10
Operating cost		41.00	36.90	45.10
Sale		4,779,000.00	5,782,590.00	3,870,990.00
Less: Operating Cost		3,321,000.00	3,287,790.00	3,287,790.00
Contribution		1,458,000.00	2,494,800.00	583,200.00
Less: Fixed cost		775,000.00	697,500.00	852,500.00
Less: Depreciation		110,500.00	110,500.00	110,500.00
Profit before tax (PBT)		572,500.00	1,686,800.00	(379,800.00)
Tax@35%	PBT*Tax rate	200,375.00	590,380.00	(132,930.00)
Profit After Tax (PAT)	PBT - Tax	372,125.00	1,096,420.00	(246,870.00)
Add Depreciation	PAT + Dep	110,500.00	110,500.00	110,500.00
Cash Profit after-tax		482,625.00	1,206,920.00	(136,370.00)
Sum of PV factors from Year 1-8		5.33	5.33	5.33
Sum of PV of inflows	Cash profit*sum of PV factors	2,574,768.76	6,438,829.13	(727,523.89)
Less Outflow	Sum of PV of inflows - Outflow	(884,000.00)	(884,000.00)	(884,000.00)
NPV		1,690,768.76	5,554,829.13	(1,611,523.89)