We are evaluating a project that costs $1,860,000, has a 6-year life, and has no salvage value. Assume that deprecia...
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We are evaluating a project that costs $1,860,000, has a 6-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 89,300 units per year. Price per unit is $38.31, variable cost per unit is $23.50, and fixed costs are $833,000 per year. The tax rate is 21 percent and we require a return of 9 percent on this project. |
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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
Best case
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | |||
| Cost of new machine | -1860000 | |||||||||
| =Initial Investment outlay | -1860000 | |||||||||
| 100.00% | ||||||||||
| Unit sales | 98230 | 98230 | 98230 | 98230 | 98230 | 98230 | ||||
| Profits | =no. of units sold * (sales price - variable cost) | 2061945.93 | 2061945.93 | 2061945.93 | 2061945.9 | 2061945.9 | 2061945.9 | |||
| Fixed cost | -749700 | -749700 | -749700 | -749700 | -749700 | -749700 | ||||
| -Depreciation | Cost of equipment/no. of years | -310000 | -310000 | -310000 | -310000 | -310000 | -310000 | 0 | =Salvage Value | |
| =Pretax cash flows | 1002245.93 | 1002245.93 | 1002245.93 | 1002245.9 | 1002245.9 | 1002245.9 | ||||
| -taxes | =(Pretax cash flows)*(1-tax) | 791774.2847 | 791774.2847 | 791774.2847 | 791774.28 | 791774.28 | 791774.28 | |||
| +Depreciation | 310000 | 310000 | 310000 | 310000 | 310000 | 310000 | ||||
| =after tax operating cash flow | 1101774.28 | 1101774.28 | 1101774.28 | 1101774.3 | 1101774.3 | 1101774.3 | ||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | ||||||||
| =Terminal year after tax cash flows | 0 | |||||||||
| Total Cash flow for the period | -1860000 | 1101774.28 | 1101774.28 | 1101774.28 | 1101774.3 | 1101774.3 | 1101774.3 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.09 | 1.1881 | 1.295029 | 1.4115816 | 1.538624 | 1.6771001 | ||
| Discounted CF= | Cashflow/discount factor | -1860000 | 1010802.092 | 927341.3686 | 850771.8978 | 780524.68 | 716077.69 | 656952 | ||
| NPV= | Sum of discounted CF= | 3082469.72 | ||||||||
Worst case
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | |||
| Cost of new machine | -1860000 | |||||||||
| =Initial Investment outlay | -1860000 | |||||||||
| 100.00% | ||||||||||
| Unit sales | 80370 | 80370 | 80370 | 80370 | 80370 | 80370 | ||||
| Profits | =no. of units sold * (sales price - variable cost) | 693512.73 | 693512.73 | 693512.73 | 693512.73 | 693512.73 | 693512.73 | |||
| Fixed cost | -916300 | -916300 | -916300 | -916300 | -916300 | -916300 | ||||
| -Depreciation | Cost of equipment/no. of years | -310000 | -310000 | -310000 | -310000 | -310000 | -310000 | 0 | =Salvage Value | |
| =Pretax cash flows | -532787.27 | -532787.27 | -532787.27 | -532787.3 | -532787.3 | -532787.3 | ||||
| -taxes | =(Pretax cash flows)*(1-tax) | -420901.943 | -420901.943 | -420901.943 | -420901.9 | -420901.9 | -420901.9 | |||
| +Depreciation | 310000 | 310000 | 310000 | 310000 | 310000 | 310000 | ||||
| =after tax operating cash flow | -110901.94 | -110901.94 | -110901.94 | -110901.9 | -110901.9 | -110901.9 | ||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | ||||||||
| =Terminal year after tax cash flows | 0 | |||||||||
| Total Cash flow for the period | -1860000 | -110901.94 | -110901.94 | -110901.94 | -110901.9 | -110901.9 | -110901.9 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.09 | 1.1881 | 1.295029 | 1.4115816 | 1.538624 | 1.6771001 | ||
| Discounted CF= | Cashflow/discount factor | -1860000 | -101744.899 | -93343.9441 | -85636.646 | -78565.73 | -72078.65 | -66127.2 | ||
| NPV= | Sum of discounted CF= | -2357497.07 | ||||||||
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