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We are evaluating a project that costs $110934, has a seven-year life, and has no salvage...

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Finance

We are evaluating a project that costs $110934, has a seven-yearlife, and has no salvage value. Assume that depreciation isstraight-line to zero over the life of the project. Sales areprojected at 4139 units per year. Price per unit is $51, variablecost per unit is $21, and fixed costs are $81850 per year. The taxrate is 36 percent, and we require a 9 percent return on thisproject. Suppose the projections given for price, quantity,variable costs, and fixed costs are all accurate to within +/-12percent. What is the NPV of the project in worst-case scenario?

Answer & Explanation Solved by verified expert
3.6 Ratings (495 Votes)

0 1 2 3 4 5 6 7
Investment -$110,934.00
Sales $163,467.32 $163,467.32 $163,467.32 $163,467.32 $163,467.32 $163,467.32 $163,467.32
VC -$85,667.37 -$85,667.37 -$85,667.37 -$85,667.37 -$85,667.37 -$85,667.37 -$85,667.37
FC -$91,672.00 -$91,672.00 -$91,672.00 -$91,672.00 -$91,672.00 -$91,672.00 -$91,672.00
Depreciation -$15,847.71 -$15,847.71 -$15,847.71 -$15,847.71 -$15,847.71 -$15,847.71 -$15,847.71
EBT -$29,719.76 -$29,719.76 -$29,719.76 -$29,719.76 -$29,719.76 -$29,719.76 -$29,719.76
Tax (36%) $10,699.11 $10,699.11 $10,699.11 $10,699.11 $10,699.11 $10,699.11 $10,699.11
Profits -$19,020.65 -$19,020.65 -$19,020.65 -$19,020.65 -$19,020.65 -$19,020.65 -$19,020.65
Cash Flows -$110,934.00 -$3,172.93 -$3,172.93 -$3,172.93 -$3,172.93 -$3,172.93 -$3,172.93 -$3,172.93
NPV -$126,903.21

In worst-case scenario, sales are lower and costs are higher

Quantity = 4139 x (1 - 12%) = 3,642.32

Price = 51 x (1 - 12%) = 44.88

VC = 21 x (1 + 12%) = 23.52

Fixed Cost (FC) = 81,850 x (1 + 12%) = 91,672

Depreciation = Investment / 7

Cash Flows = Investment + Profits + Depreciation
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