Question

Consider the project where the initial cost is $200,000, and the project has a 5-year life. There is no salvage. Depreciation is straight-line (Depreciation = 200,000/5 = 40,000)

Unit Sales = 6000, Price per unit = $80 (Sales = 6,000 x 80) Variable cost per unit = $60 (Variable Costs = 6,000 x 60)The required return is 12%, and the tax rate is 21%

 What are the cash flow each year, NPV and IRR in each case, if we changed fixed costs only?

Show all work as follows:

1. Complete the income statement for each case:

   

Base

$480,000 Costs 360,000

Fixed Costs 50,000 Depreciation 40,000

Worst

$480,000 360,000

55,000

40,000

Best

$480,000 360,000

45,000

40,000

Sales

Variable

  

EBIT
Taxes (21%) Net Income

30,000 6,300 23,700

      

2. Complete the project cash flow for each case:

Year 012345

                

OCF
Change
in0 0 NWC
NCS -200,000 0 Total -200,000 ? ? ? ? ?

3. Calculate the NPV and IRR for each case

      

Answer 1

* OCF = net income + depreciation