Question

We are evaluating a project that costs $571,800, 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 80,000 units per year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $685,000 per year. The tax rate is 23 percent, and we require a return of 11 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.)

  

Answer 1

			best	Worst
Sales units			88000	72000
Selling price			44	36
Less: VC per unit			22.5	27.5
CM per unit			21.5	8.5
Total Contribution			1892000	612000
Less: FC			616500	753500
Less: Depreciation			95300	95300
Net Income before tax			1180200	-236800
Tax @ 23%			271446	54464
After tax Income			908754	-182336
Add: Depreciation			95300	95300
Annual Operating cashflows			1004054	-87036
Annuity PVF at 11% for 6yrs			4.23054	4.23054
Present value of inflows			4247691	-368209
Less: Initial Investment			-571800	-571800
NPV			3675891	-940009