Question

P11-6 Scenario Analysis [LO2]

We are evaluating a project that costs $741,000, has an ten-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 118,000 units per year. Price per unit is $36, variable cost per unit is $23, and fixed costs are $749,151 per year. The tax rate is 33 percent, and we require a 12 percent return on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 15 percent.

  

Required:
(a)	Calculate the best-case NPV. (Do not round your intermediate calculations.)

  

(b)	Calculate the worst-case NPV. (Do not round your intermediate calculations.)

Answer 1

We use the formula SALES- VARIABLE COST = CONTRIBUTION . THEN CONTRIBUTION - FIXED COST = PROFIT. THEN PROFIT - TAX = NET PROFIT AFTER TAX. So, we calculate sales = units * expected sales = 118000*36 = $ 42,48,000. Variable cost = $23 * 118000 =$ 27,14,000 . contribution = sales - variable cost = $ 1534000. Now profit = $ 784,849. profit after depriciation & tax = $ 784,789 * 33% - $ 784,789= $ 525788. Now we will use the discount rate @ 12% for 10 years = 0.3220. So the value is $784,849 * 0.3220 = $ 252721.378. Now we deduct the initial investment to find Net Present Value = - $ 488278.