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)