Question

1. Adana Company is considering a project with estimated annual unit sales of 160,000; sale price per unit of $34; variable costs per unit of $19; and annual fixed costs of $310,000. The firm expects that the true values for unit sales, price per unit, variable costs per unit, and fixed costs will be within plus or minus 15% of these estimates. The project requires a fixed asset investment of $1,500,000 that will be depreciated straight-line to zero over the project’s 5 year life. The firm’s discount rate is 10% and the tax rate is 30%. Calculate the worst case OCF.

Answer 1

	Estimated	15% Deviation
Annual Sales (in Units)	1,60,000	1,36,000
Sale Price	34.00	28.90
Variable Cost	19.00	21.85
Contribution Margin	15.00	7.05
Total Contribution Margin	24,00,000	9,58,800
Annual Fixed Cost	3,10,000	3,56,500
Depreciation	3,00,000	3,00,000
Net Income before tax	17,90,000	3,02,300
Tax @ 30%	5,37,000	90,690
Net Income after tax	12,53,000	2,11,610
Depreciation	3,00,000	3,00,000
Annual Cash Inflows	15,53,000	5,11,610
PVIFA @ 10% for 5 Years	3.7908	3.7908
Total PV of Cash Inflows	58,87,092	19,39,404
Initial Investment	15,00,000	15,00,000
Net Present Value	43,87,092	4,39,404