Question

We are evaluating a project that costs $735,200, has an eight-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 80,000 units per year. Price per unit is $48, variable cost per unit is $33, and fixed costs are $730,000 per year. The tax rate is 22 percent, and we require a return of 12 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±15 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

Calculation of Best Case NPV of the project
Particulars	0	1	2	3	4	5	6	7	8
Initial Investment
Cost of Project (A)	-735200
Operating Cash Flows
Sales Units (B = 80000 * (1+15%))		92000	92000	92000	92000	92000	92000	92000	92000
Annual Sales (C = B*$48*(1+15%))		5078400	5078400	5078400	5078400	5078400	5078400	5078400	5078400
Variable Costs (D = B*$33*(1-15%))		2580600	2580600	2580600	2580600	2580600	2580600	2580600	2580600
Fixed Costs (E * $730000*(1-15%))		620500	620500	620500	620500	620500	620500	620500	620500
Depreciation (F) $735200 / 8 years		91900	91900	91900	91900	91900	91900	91900	91900
Profit Before Tax (G = C-D-E-F)		1785400	1785400	1785400	1785400	1785400	1785400	1785400	1785400
Tax @22% (H = G*22%)		392788	392788	392788	392788	392788	392788	392788	392788
Profit After Tax (I = G-H)		1392612	1392612	1392612	1392612	1392612	1392612	1392612	1392612
Add back Depreciation (J = F)		91900	91900	91900	91900	91900	91900	91900	91900
Net Operating Cash Flows (K = I+J)		1484512	1484512	1484512	1484512	1484512	1484512	1484512	1484512
Total Cash Flows (L = A+K)	-735200	1484512	1484512	1484512	1484512	1484512	1484512	1484512	1484512
Discount Factor @12% (M) 1/(1+12%)^n n=0,1,2,3,4,5,6,7,8	1	0.892857143	0.797193878	0.711780248	0.635518078	0.567426856	0.506631121	0.452349215	0.403883228
Discounted Cash Flows (N = L*M)	-735200	1325457.143	1183443.878	1056646.319	943434.2136	842351.9764	752099.979	671517.8384	599569.4985
NPV of the Project	6639320.846
Calculation of Worst Case NPV of the project
Particulars	0	1	2	3	4	5	6	7	8
Initial Investment
Cost of Project (A)	-735200
Operating Cash Flows
Sales Units (B = 80000 * (1-15%))		68000	68000	68000	68000	68000	68000	68000	68000
Annual Sales (C = B*$48*(1-15%))		2774400	2774400	2774400	2774400	2774400	2774400	2774400	2774400
Variable Costs (D = B*$33*(1+15%))		2580600	2580600	2580600	2580600	2580600	2580600	2580600	2580600
Fixed Costs (E * $730000*(1+15%))		839500	839500	839500	839500	839500	839500	839500	839500
Depreciation (F) $735200 / 8 years		91900	91900	91900	91900	91900	91900	91900	91900
Profit Before Tax (G = C-D-E-F)		-737600	-737600	-737600	-737600	-737600	-737600	-737600	-737600
Tax @22% (H = G*22%)		-162272	-162272	-162272	-162272	-162272	-162272	-162272	-162272
Profit After Tax (I = G-H)		-575328	-575328	-575328	-575328	-575328	-575328	-575328	-575328
Add back Depreciation (J = F)		91900	91900	91900	91900	91900	91900	91900	91900
Net Operating Cash Flows (K = I+J)		-483428	-483428	-483428	-483428	-483428	-483428	-483428	-483428
Total Cash Flows (L = A+K)	-735200	-483428	-483428	-483428	-483428	-483428	-483428	-483428	-483428
Discount Factor @12% (M) 1/(1+12%)^n n=0,1,2,3,4,5,6,7,8	1	0.892857143	0.797193878	0.711780248	0.635518078	0.567426856	0.506631121	0.452349215	0.403883228
Discounted Cash Flows (N = L*M)	-735200	-431632.143	-385385.842	-344094.502	-307227.234	-274310.03	-244919.67	-218678.276	-195248.461
NPV of the Project	-3136696.157
Base Case	1186372.48
Best Case	6639320.85
Worst Case	-3136696.16