Question

A project manager is evaluating a project and initially forecasts that the project will lasts for four years and has its annual marketing and support costs of $1,000,000 and its annual revenue of $10,000,000. The project pays a 40% tax rate on its pre-tax income and its cost of capital is 15%. While analysing a situation that competitors can run their big promotion programs during the project’s life, the manager proposes one solution to the situation by increasing the marketing and support costs by 60% of the originally forecasted level and simultaneously lowering the forecasted revenue by 30% of the originally forecasted level. The change in the net present value (NPV) of the project is closest to:

	A.	-$6,166,753.26
	B.	$6,166,753.26
	C.	$6,656,717.44
	D.	-$6,656,717.44

Answer 1

Solution:

Refer below attached image for calculation of change of NPV of the project :

Note: PV factor at 15% can be calculated by the given formula = (1/1.15)ⁿ

^{Where: n = the number of year for which pv factor is calculated.}

^{Therefore from the above calulation the change in NPV = New NPV - Actuallty Forecasted NPV}

^{= 92,50,129.90 - 1,54,16,883.16}

^{= - $61,66,753.26}

^{Thus as per new method the NPV will be reduced by $61,66,753.26} .