Question

The initial cost of the project is $160,000 and it has a 5-year life, with a salvage value of zero. Depreciation is straight-line; the required return is 12% and the tax rate is 30%.

                                 Base Case           Lower Bound           Upper Bound

Unit Sales                  5,000                     5,500                            6,000

Price/unit                   $ 80                       $ 77                               $ 85

Var. cost/unit             $ 60                       $ 57                             $ 65

Fixed cost/year         $ 50,000             $ 46,000                            $60,000

EBIT for the worst case is:

Answer 1

Solution :- Depreciation Per year = $160,000 / 5 = $32,000

EBIT for Base Case

= Sales - Variable Cost - Fixed Cost - Depreciation

= ( 5,000 * $80 ) - ( 5,000 * $60 ) - $50,000 - $32,000

= $400,000 - $300,000 - $50,000 - $32,000

= $18,000

EBIT for Lower Bond

= Sales - Variable Cost - Fixed Cost - Depreciation

= ( 5,500 * $77 ) - ( 5,500 * $57 ) - $46,000 - $32,000

= $423,500 - $256,500 - $46,000 - $32,000

= $89,000

EBIT for Upper Bond

= Sales - Variable Cost - Fixed Cost - Depreciation

= ( 6,000 * $85 ) - ( 6,000 * $65 ) - $60,000 - $32,000

= $510,000 - $390,000 - $60,000 - $32,000

= $28,000

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