We are evaluating a project that costs $105790, has a seven-year life, and has no salvage...

We are evaluating a project that costs $105790, 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 4108 units per year. Price per unit is $54, variable cost per unit is $24, and fixed costs are $83887 per year. The tax rate is 31 percent, and we require a 9 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-11 percent. What is the NPV of the project in worst-case scenario? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Expert Solution

Time line		0	1	2	3	4	5	6	7



Cost of new machine		-105790

=Initial Investment outlay		-105790


Unit sales			3656.12	3656.12	3656.12	3656.12	3656.12	3656.12	3656.12
Profits	=no. of units sold * (sales price - variable cost)		78314.09	78314.09	78314.09	78314.09	78314.09	78314.09	78314.09
Fixed cost			-93114.6	-93114.6	-93114.57	-93114.57	-93114.57	-93114.57	-93114.6

-Depreciation	Cost of equipment/no. of years		-15112.9	-15112.9	-15112.86	-15112.86	-15112.86	-15112.86	-15112.9

=Pretax cash flows			-29913.3	-29913.3	-29913.34	-29913.34	-29913.34	-29913.34	-29913.3
-taxes	=(Pretax cash flows)*(1-tax)		-20640.2	-20640.2	-20640.2	-20640.2	-20640.2	-20640.2	-20640.2
+Depreciation			15112.86	15112.86	15112.857	15112.857	15112.857	15112.857	15112.86
=after tax operating cash flow			-5527.35	-5527.35	-5527.345	-5527.345	-5527.345	-5527.345	-5527.35




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

Total Cash flow for the period		-105790	-5527.35	-5527.35	-5527.345	-5527.345	-5527.345	-5527.345	-5527.35
Discount factor=	(1+discount rate)^corresponding period	1	1.09	1.1881	1.295029	1.4115816	1.538624	1.6771001	1.828039
Discounted CF=	Cashflow/discount factor	-105790	-5070.96	-4652.26	-4268.125	-3915.711	-3592.395	-3295.775	-3023.65
NPV=	Sum of discounted CF=	-133609

jeff jeffy answered 1 year ago

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