We are evaluating a project that costs $115571, has a seven-year life, and has no salvage...

We are evaluating a project that costs $115571, 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 4293 units per year. Price per unit is $45, variable cost per unit is $25, and fixed costs are $81427 per year. The tax rate is 35 percent, and we require a 8 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-8 percent. What is the NPV of the project in best-case scenario? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" 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		-115571

=Initial Investment outlay		-115571


Unit sales			4636.44	4636.44	4636.44	4636.44	4636.44	4636.44	4636.44
Profits	=no. of units sold * (sales price - variable cost)		118692.9	118692.9	118692.86	118692.86	118692.86	118692.86	118692.9
Fixed cost			-74912.8	-74912.8	-74912.84	-74912.84	-74912.84	-74912.84	-74912.8

-Depreciation	Cost of equipment/no. of years		-16510.1	-16510.1	-16510.14	-16510.14	-16510.14	-16510.14	-16510.1

=Pretax cash flows			27269.88	27269.88	27269.881	27269.881	27269.881	27269.881	27269.88
-taxes	=(Pretax cash flows)*(1-tax)		17725.42	17725.42	17725.423	17725.423	17725.423	17725.423	17725.42
+Depreciation			16510.14	16510.14	16510.143	16510.143	16510.143	16510.143	16510.14
=after tax operating cash flow			34235.57	34235.57	34235.566	34235.566	34235.566	34235.566	34235.57




+Tax shield on salvage book value	=Salvage value * tax rate								0
=Terminal year after tax cash flows									0

Total Cash flow for the period		-115571	34235.57	34235.57	34235.566	34235.566	34235.566	34235.566	34235.57
Discount factor=	(1+discount rate)^corresponding period	1	1.08	1.1664	1.259712	1.360489	1.4693281	1.5868743	1.713824
Discounted CF=	Cashflow/discount factor	-115571	31699.6	29351.48	27177.296	25164.163	23300.151	21574.214	19976.12
NPV=	Sum of discounted CF=	62672

jeff jeffy answered 1 year ago

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