The current available answer to this question is wrong. We are evaluating a project that costs...

The current available answer 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 $

Expert Solution

Best case

Time line		0	1	2	3	4	5	6



Cost of new machine		-768000

=Initial Investment outlay		-768000


Unit sales			57200	57200	57200	57200	57200	57200
Profits	=no. of units sold * (sales price - variable cost)		1973400	1973400	1973400	1973400	1973400	1973400
Fixed cost			-693000	-693000	-693000	-693000	-693000	-693000

-Depreciation	Cost of equipment/no. of years		-128000	-128000	-128000	-128000	-128000	-128000

=Pretax cash flows			1152400	1152400	1152400	1152400	1152400	1152400
-taxes	=(Pretax cash flows)*(1-tax)		749060	749060	749060	749060	749060	749060
+Depreciation			128000	128000	128000	128000	128000	128000
=after tax operating cash flow			877060	877060	877060	877060	877060	877060




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

Total Cash flow for the period		-768000	877060	877060	877060	877060	877060	877060
Discount factor=	(1+discount rate)^corresponding period	1	1.15	1.3225	1.520875	1.7490063	2.0113572	2.3130608
Discounted CF=	Cashflow/discount factor	-768000	762660.9	663183.4	576681.19	501461.9	436053.83	379177.24
NPV=	Sum of discounted CF=	2551218.39

Worst case

Time line		0	1	2	3	4	5	6



Cost of new machine		-768000

=Initial Investment outlay		-768000


Unit sales			46800	46800	46800	46800	46800	46800
Profits	=no. of units sold * (sales price - variable cost)		725400	725400	725400	725400	725400	725400
Fixed cost			-847000	-847000	-847000	-847000	-847000	-847000

-Depreciation	Cost of equipment/no. of years		-128000	-128000	-128000	-128000	-128000	-128000

=Pretax cash flows			-249600	-249600	-249600	-249600	-249600	-249600
-taxes	=(Pretax cash flows)*(1-tax)		-162240	-162240	-162240	-162240	-162240	-162240
+Depreciation			128000	128000	128000	128000	128000	128000
=after tax operating cash flow			-34240	-34240	-34240	-34240	-34240	-34240




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

Total Cash flow for the period		-768000	-34240	-34240	-34240	-34240	-34240	-34240
Discount factor=	(1+discount rate)^corresponding period	1	1.15	1.3225	1.520875	1.7490063	2.0113572	2.3130608
Discounted CF=	Cashflow/discount factor	-768000	-29773.9	-25890.4	-22513.36	-19576.83	-17023.33	-14802.9
NPV=	Sum of discounted CF=	-897580.69

jeff jeffy answered 1 year ago

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