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Sabre is considering opening a new online storefront to support the launch of their 'Pyramid' tablet....

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Accounting

Sabre is considering opening a new online storefront to supportthe launch of their 'Pyramid' tablet. The severs required tosupport the store will cost $622,000, are expected to have a fiveyear life, and have no salvage value; depreciation is straight-lineto zero. There are no expected NWC requirements.

Sales are projected at 14,000 units per year, price per unit willbe $255.00, variable cost per unit will be $186.00, and fixed costswill be $200,000 per year. The required return is 11 percent andthe relevant tax rate is 34 percent.

Based on your experience, you think the unit sales price andquantity, variable cost, and fixed cost projections given here areprobably accurate to within +/- 9 percent. What is the worst caseNPV? Round your answer to the nearest dollar.

Answer & Explanation Solved by verified expert
4.4 Ratings (730 Votes)

Worst case NPV
Normal case Worst case
Quantity 14000 14000*(1-.09) 12740
selling price per unit 255 255*(1-.09) 232.05
Variable cost per unit 186 186*(1+.09) 202.74
fixed cost 200000 200000*(1+.09) 218000
Year 0 1 2 3 4 5
Initial investment -622000
sales revenue = quantity sold*selling price 2956317 2956317 2956317 2956317 2956317
variable cost= quantity*variable cost 2582908 2582908 2582908 2582908 2582908
fixed cost 218000 218000 218000 218000 218000
Annual depreciation 124400 124400 124400 124400 124400
operating profit 31009.4 31009.4 31009.4 31009.4 31009.4
tax rate -34% 10543.2 10543.2 10543.2 10543.2 10543.2
after tax profit 20466.2 20466.2 20466.2 20466.2 20466.2
add annual depreciation 124400 124400 124400 124400 124400
net operating cash flow -622000 144866.2 144866.2 144866.2 144866.2 144866.2
present value factor at 11% =1/(1+r)^n r =11% 1 0.900901 0.811622 0.731191 0.658731 0.593451
present value of net operating cash flow = net operating cash flow*present value factor at 11% -622000 130510.1 117576.7 105924.9 95427.86 85971.04
NPV =sum of present value of cash flow -86589.4
Worst case NPV -86589

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