A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are projected at 31,000 units per year, the price per unit is $47, variable cost per unit is $23, and fixed costs are $842,900 per year. The tax rate is 23 percent and the required return is 11.5 percent. Suppose the projections given for price and quantity can vary by ±4 percent while variable and fixed cost estimates are accurate to within ±2 percent. What is the best-case NPV?
Best Case: | ||||||
Sales qty = 31000+4% = 32240 | ||||||
Selling price = 47+4% = 48.88 | ||||||
Variable cost = 23-2% = 22.54 | ||||||
Fixed cost = 842900-2% = 826042 | ||||||
CM per unit = Sselling price - VC per unit = 48.88-22.54 = 26.34 | ||||||
Annual Operating cashflows: | ||||||
Sales units | 32240 | |||||
CM per unit | 26.34 | |||||
Total Contribution | 849201.6 | |||||
Less: Fixed cost | 826042 | |||||
Less: Depreciation (227000/4) | 56750 | |||||
Net income before tax | -33590.4 | |||||
Less: Tax @ 23% | 7725.8 | |||||
After tax Income | -25864.6 | |||||
Add: Depreciation | 56750 | |||||
Annual Operating cashflows: | 30885.4 | |||||
Annuity PVF at 11.505 for 4 yrs | 3.069614 | |||||
Present value of inflows | 94806.26 | |||||
Less: Initial investment | -227000 | |||||
Net present value | -132194 | |||||
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