Question

We are evaluating a project that costs $500,000, 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 50,000 units per year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $600,000 per year. The tax rate is 35 percent, and we require a return of 12 percent 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	$

PLEASE SHOW WORK, NO EXCEL PLEASE

Answer 1

Ans:

	Best Scenerio	Worst Scenerio
Sales quantity (A)	55000	45000
	50000*110%	50000*90%
Sales (A* 40*110%) , (A*40*90%)	2420000	1620000
Less: Variable cost (A*25*110%) , (A*25*90%)	1512500	1012500
Less: Fixed cost (600000*110%) , (600000*90%)	660000	540000
Less: Depreciation (50000/8)	40,000	40,000
Net Income before taxes	2,07,500	27,500
Tax rate ( 35%)	72625	9625
Net Income (A)	1,34,875	17,875
Present value annuity factor ( 12%, 8 years ) (B)	5.650223	5.650223
Present value of cash flows C = A*B	762074	100998
Present value of cash inflows D	500000	500000
NPV (C - D)	262074	-399002

Note 1:

1/(1.12)	0.892857
1/(1.12)^2	0.797194
1/(1.12)^3	0.71178
1/(1.12)^4	0.635518
1/(1.12)^5	0.567427
1/(1.12)^6	0.506631
1/(1.12)^7	0.452349
1/(1.12)^8	0.403883
1/(1.12)^9	0.36061
1/(1.12)^10	0.321973
Total	5.650223