We are evaluating a project that costs $1,638,000, has a seven-year life, and has no salvage...

We are evaluating a project that costs $1,638,000, has a seven-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 87,900 units per year. Price per unit is $34.70, variable cost per unit is $20.95, and fixed costs are $759,000 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. (A negative answer should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	NPV
Best-case	$
Worst-case	$

Expert Solution

In best case the sale price and quantity would increase while the variable cost and fixed cost would decrease

Sales quantity	87900*1.1	96690.00
Sales price per unit	34.70*1.1	38.170
Variable cost per unit	20.95*0.90	18.8550
Fixed costs	759000*0.90	683100.0

Depreciation = (1638000/7)		234000

NPV of project is present value of cash inflow less present value of cash outflow
Calculation of Best case NPV of project
Year	0	1	2	3	4	5	6	7
Sales		$3,690,657.30	$3,690,657.30	$3,690,657.30	$3,690,657.30	$3,690,657.30	$3,690,657.30	$3,690,657.30
Less: Variable cost		$1,823,089.95	$1,823,089.95	$1,823,089.95	$1,823,089.95	$1,823,089.95	$1,823,089.95	$1,823,089.95
Fixed costs		$683,100.00	$683,100.00	$683,100.00	$683,100.00	$683,100.00	$683,100.00	$683,100.00
Depreciation		$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00
EBT		$950,467.35	$950,467.35	$950,467.35	$950,467.35	$950,467.35	$950,467.35	$950,467.35
Tax @ 35%		$332,663.57	$332,663.57	$332,663.57	$332,663.57	$332,663.57	$332,663.57	$332,663.57
Net Income		$617,803.78	$617,803.78	$617,803.78	$617,803.78	$617,803.78	$617,803.78	$617,803.78
Add: Depreciation		$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00
Free cash flow		$851,803.78	$851,803.78	$851,803.78	$851,803.78	$851,803.78	$851,803.78	$851,803.78
Cash outflow	-$1,638,000
Discount factor @ 12%	1	0.89286	0.79719	0.71178	0.63552	0.56743	0.50663	0.45235
Present value	-$1,638,000	$760,539.09	$679,052.76	$606,297.10	$541,336.70	$483,336.34	$431,550.30	$385,312.77
NPV Best case	$2,249,425.06

In worst case the sale price and quantity would decrease while the variable cost and fixed cost would increase

Sales quantity	87900*0.90	79110.00
Sales price per unit	34.70*0.90	31.230
Variable cost per unit	20.95*1.1	23.0450
Fixed costs	759000*1.1	834900.0

Depreciation = (1638000/7)		234000

NPV of project is present value of cash inflow less present value of cash outflow
Calculation of Worst case NPV
Year	0	1	2	3	4	5	6	7
Sales		$2,470,605.30	$2,470,605.30	$2,470,605.30	$2,470,605.30	$2,470,605.30	$2,470,605.30	$2,470,605.30
Less: Variable cost		$1,823,089.95	$1,823,089.95	$1,823,089.95	$1,823,089.95	$1,823,089.95	$1,823,089.95	$1,823,089.95
Fixed costs		$834,900.00	$834,900.00	$834,900.00	$834,900.00	$834,900.00	$834,900.00	$834,900.00
Depreciation		$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00
EBT		-$421,384.65	-$421,384.65	-$421,384.65	-$421,384.65	-$421,384.65	-$421,384.65	-$421,384.65
Tax @ 35%		-$147,484.63	-$147,484.63	-$147,484.63	-$147,484.63	-$147,484.63	-$147,484.63	-$147,484.63
Net Income		-$273,900.02	-$273,900.02	-$273,900.02	-$273,900.02	-$273,900.02	-$273,900.02	-$273,900.02
Add: Depreciation		$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00	$234,000.00
Free cash flow		-$39,900.02	-$39,900.02	-$39,900.02	-$39,900.02	-$39,900.02	-$39,900.02	-$39,900.02
Cash outflow	-$1,638,000
Discount factor @ 12%	1	0.89286	0.79719	0.71178	0.63552	0.56743	0.50663	0.45235
Present value	-$1,638,000	-$35,625.02	-$31,808.05	-$28,400.05	-$25,357.19	-$22,640.34	-$20,214.59	-$18,048.74
NPV worst case	-$1,820,093.99

NPV for best case	$2,249,425.06
NPV for worst case	-$1,820,093.99

jeff jeffy answered 1 year ago

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