Question

We are evaluating a project that costs $571,800, has a six-year life, and has no salvage...

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.)

  

Homework Answers

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
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