Question

You are performing a sensitivity analysis on an investment project and looking at the EXPECTED case of outcome. At t = 0, you invest $5 million in a 10-year project and expect to receive a revenue (sales) of $10 million each year. Variable cost is 75% of revenue (sales) and the cost of capital is 8% p.a.

Using the straight-line depreciation method, determine the depreciation per year. A. $ 500,000 B. $ 750,000 C. $ 1,000,000 D. $ 1,500,000 E. $ 2,000,000

Determine the variable cost in $ amount. A. $ 5 million B. $ 7.5 million C. $ 10 million D. $ 15 million E. $ 20 million

Determine the NPV of this project using Total Cash Flow. You expect to have a Total Cash Flow of $1 million for each of the next 10 years. A. $ 1.71 million B. $ 5.67 million C. $ 5.92 million D. $ 6.55 million E. $ 7.86 million

Answer 1

Solution:-

To Calculate Depreciation per year-

Depreciation per year =

Depreciation per year =

Depreciation per year = $5,00,000

The Correct Answer is point A i.e. $5,00,000.

To Calculate Variable Cost of Each Year-

Variable Cost = Sales * 0.75

Variable Cost = $10,000,000 * 0.75

Variable Cost = $75,00,000

The Correct Answer is point B i.e. $7.50 Million

To Calculate NPV of this Project-

The Correct Answer is Point A i.e. $1.71 Million.

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