Question

The only current answer available to this question is wrong.

We are evaluating a project that costs $768,000, has a six-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 52,000 units per year. Price per unit is $60, variable cost per unit is $35, and fixed costs are $770,000 per year. The tax rate is 35 percent, and we require a return of 15 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. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Best-case $ Worst-case $

Answer 1

Project cost	768,000
Depreciation (straight line 6 years)	128,000
Sales unit	52,000
Price per unit	60
Variable cost per unit	-35
Income after variable cost	=52000*(60-35)
Income after variable cost	1,300,000
Fixed costs	-770,000
Depreciation	-128,000
Operating profit before tax	402,000
Tax (@35%)	-140,700
Net operating profit after tax	261,300
Net operating profit after tax	261,300
Depreciation	128,000
Annual Cash flow (base case)	389,300
Annual Cash flow (Best case)	428,230
Annual Cash flow (Worst case)	350,370

NPV - Best case
Year	Cash flow	Discount factor @15%	Present value
0	-768,000	1.000	-768,000
1	428,230	0.870	372,374
2	428,230	0.756	323,803
3	428,230	0.658	281,568
4	428,230	0.572	244,842
5	428,230	0.497	212,906
6	428,230	0.432	185,136
		NPV -Best case	852,629.02
NPV - Worst case
Year	Cash flow	Discount factor @15%	Present value
0	-768,000	1.000	-768,000
1	350,370	0.870	304,670
2	350,370	0.756	264,930
3	350,370	0.658	230,374
4	350,370	0.572	200,325
5	350,370	0.497	174,196
6	350,370	0.432	151,475
		NPV -Worst case	557,969.20