Question

Wendy and Wayne are evaluating a project that requires an initial investment of $982,000 in fixed assets. The project will last for twelve years, and the assets have no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 102,000 units per year. Price per unit is $37, variable cost per unit is $25, and fixed costs are $992,802 per year. The tax rate is 32 percent, and the required annual return on this project is 19 percent. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 11 percent.

  

Required:
(a)	Calculate the best-case NPV. (Do not round your intermediate calculations.)
	(Click to select)  $2,896,460  $2,364,138  $3,048,905  $3,201,350  $411,853

  

(b)	Calculate the worst-case NPV. (Do not round your intermediate calculations.)
	(Click to select)  $-2,398,656  $-833,310  $-2,841,955  $411,853  $3,201,350

Answer 1

Initial Investment = $982,000
Useful Life = 12 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $982,000 / 12
Annual Depreciation = $81,833.3333

Requirement A:

Annual OCF = [(Price - Variable Cost) * Quantity - Fixed Costs] * (1 - Tax Rate) + Tax Rate * Depreciation
Annual OCF = [($41.07 - $22.25) * 113,220 - $883,593.78] * (1 - 0.32) + 0.32 * $81,833.3333
Annual OCF = $1,247,206.62 * 0.68 + 0.32 * $81,833.3333
Annual OCF = $874,287.1683

Net Present Value = -$982,000 + $874,287.1683 * PVA of $1 (19%, 12)
Net Present Value = -$982,000 + $874,287.1683 * (1 - (1/1.19)^12) / 0.19
Net Present Value = -$982,000 + $874,287.1683 * 4.610504
Net Present Value = $3,048,905

Requirement B:

Annual OCF = [(Price - Variable Cost) * Quantity - Fixed Costs] * (1 - Tax Rate) + Tax Rate * Depreciation
Annual OCF = [($32.93 - $27.75) * 90,780 - $1,102,010.22] * (1 - 0.32) + 0.32 * $81,833.3333
Annual OCF = -$631,769.82 * 0.68 + 0.32 * $81,833.3333
Annual OCF = -$403,416.8109

Net Present Value = -$982,000 - $403,416.8109 * PVA of $1 (19%, 12)
Net Present Value = -$982,000 - $403,416.8109 * (1 - (1/1.19)^12) / 0.19
Net Present Value = -$982,000 - $403,416.8109 * 4.610504
Net Present Value = -$2,841,955