Question

We are evaluating a project that costs $848,000, 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 62,000 units per year. Price per unit is $40, variable cost per unit is $20, and fixed costs are $625,000 per year. The tax rate is 35 percent, and we require a 20 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent.

  

Calculate the best-case and worst-case NPV figures. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

  

	NPV
Best-case	$
Worst-case	$

Answer 1

best case

Sales price and unit sales are increased by 10%. Variable and fixed costs are decreased by 10%.

Operating cash flow (OCF) each year = income after tax + depreciation

NPV is are calculated using NPV function in Excel

NPV is $2,314,030.72

worst case

Sales price and unit sales are decreased by 10%. Variable and fixed costs are increased by 10%.

Operating cash flow (OCF) each year = income after tax + depreciation

NPV is are calculated using NPV function in Excel

NPV is -$471,939.15