We are evaluating a project that costs $100356, has a seven-year life, and has no salvage...

We are evaluating a project that costs $100356, 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 4229 units per year. Price per unit is $51, variable cost per unit is $30, and fixed costs are $81802 per year. The tax rate is 33 percent, and we require a 11 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-12 percent. What is the NPV of the project in worst-case scenario? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

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Expert Solution

Time line		0	1	2	3	4	5	6	7



Cost of new machine		-100356

=Initial Investment outlay		-100356


Unit sales			3721.52	3721.52	3721.52	3721.52	3721.52	3721.52	3721.52
Profits	=no. of units sold * (sales price - variable cost)		41978.75	41978.75	41978.746	41978.746	41978.746	41978.746	41978.75
Fixed cost			-91618.2	-91618.2	-91618.24	-91618.24	-91618.24	-91618.24	-91618.2

-Depreciation	Cost of equipment/no. of years		-14336.6	-14336.6	-14336.57	-14336.57	-14336.57	-14336.57	-14336.6

=Pretax cash flows			-63976.1	-63976.1	-63976.07	-63976.07	-63976.07	-63976.07	-63976.1
-taxes	=(Pretax cash flows)*(1-tax)		-42864	-42864	-42863.96	-42863.96	-42863.96	-42863.96	-42864
+Depreciation			14336.57	14336.57	14336.571	14336.571	14336.571	14336.571	14336.57
=after tax operating cash flow			-28527.4	-28527.4	-28527.39	-28527.39	-28527.39	-28527.39	-28527.4




+Tax shield on salvage book value	=Salvage value * tax rate								-4.8E-12
=Terminal year after tax cash flows									-4.8E-12

Total Cash flow for the period		-100356	-28527.4	-28527.4	-28527.39	-28527.39	-28527.39	-28527.39	-28527.4
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631	1.5180704	1.6850582	1.8704146	2.07616
Discounted CF=	Cashflow/discount factor	-100356	-25700.4	-23153.5	-20858.98	-18791.88	-16929.62	-15251.91	-13740.5
NPV=	Sum of discounted CF=	-234783
IRR is discount rate at which NPV = 0 =	11.00%

jeff jeffy answered 11 months ago

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