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saw5
12 days ago
13

We are evaluating a project that costs $1.68 million, 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 90,000 units per year. Price per unit is $37.95, variable cost per unit is $23.20, and fixed costs are $815,000 per year. The tax rate is 21 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.
Required:
Calculate the best-case and worst-case NPV figures.
Business
1 answer:
Katen [2.8K]12 days ago
3 0

Response:

                              Best-Case        Worst-Case

                                  NPV                     NPV

PV of cash inflows $2,897,706      $3,187,477

PV of project cost  $1,680,000     $1,848,000 ($1,680,000 * 1.1)

NPV                         $1,217,706    $1,339,477

Clarification:

a) Data and Calculations:

Initial project expenditure = $1.68 million

Projected lifespan of the project = 6 years

Resale value = $0

Depreciation yearly = $280,000 ($1.68 million/6)

Income Statement:

Sales Revenue (90,000 * $37.95) = $3,415,500

Cost of Goods Sold:

Variable cost (90,000 * $23.20) =    2,088,000

Gross Profit =                                    $1,327,500

Fixed Costs =                                         815,000

Income Before Tax =                           $512,500

Income Tax (21% of $512,500) =          107,625

Net Income =                                     $404,875

Add Depreciation Expense                280,000

Annual Cash Inflows =                      $684,875

PV Annuity Factor for 6 Years at 11% = 4.231

PV of Annual Cash Inflows = $2,897,706 ($684,875 * 4.231)

Annual Cash Inflows = $753,363 ($684,875 * 1.1)

PV of Annual Cash Inflows = $3,187,477 ($753,363 * 4.231)

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<p.to calculate="" the="" cost="" for="" width="" of="" lot:="">

100 feet multiplied by $40 equals $4000.

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</p.to>
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