we are evaluating a project that cost 690000 has a fiveyeqar

we are evaluating a project that cost $690,000, has a five-yeqar life, and has no salvage value. assume that depreciation is straight line to zero over the project. sales are projected at $71000 units per year. prices per unit is $75, variable cost per unit $50 and fixed cost are $790000 per year. The tax rate is 35% and are are require a return of 15% on this project. suppose the projections given for price, quantity, variable cost, and fixed costs are all accurate to within = or - 10% what are the worse and best case npv

Solution

1) BASE CASE: Sales units 71000 Sales price per unit $                 75.00 Variable cost per unit $                 50.00 Fixed cost $      790,000.00 Initial project cost $      690,000.00 OCF: Sales revenue $   5,325,000.00 Variable cost $   3,550,000.00 Fixed cost $      790,000.00 Depreciation $      138,000.00 EBIT $      847,000.00 Tax at 35% $      296,450.00 NOPAT $      550,550.00 Add: Depreciation $      138,000.00 OCF $      688,550.00 PVIFA(15,5) 3.35216 PV of OCF $   2,308,126.39 Initial project cost $      690,000.00 NPV $   1,618,126.39 2) BEST CASE: Sales units (71000*110%) 78100 Sales price per unit (75*110%) $                 82.50 Variable cost per unit (50*90%) $                 45.00 Fixed cost (790000*90%) $      711,000.00 Initial project cost $      690,000.00 OCF: Sales revenue $   6,443,250.00 Variable cost $   3,514,500.00 Fixed cost $      711,000.00 Depreciation $      138,000.00 EBIT $   2,079,750.00 Tax at 35% $      727,912.50 NOPAT $   1,351,837.50 Add: Depreciation $      138,000.00 OCF $   1,489,837.50 PVIFA(15,5) 3.35216 PV of OCF $   4,994,166.37 Initial project cost $      690,000.00 NPV $   4,304,166.37 3) WORST CASE: Sales units (71000*90%) 63900 Sales price per unit (75*90%) $                 67.50 Variable cost per unit (50*110%) $                 55.00 Fixed cost (790000*110%) $      869,000.00 Initial project cost $      690,000.00 OCF: Sales revenue $   4,313,250.00 Variable cost $   3,514,500.00 Fixed cost $      869,000.00 Depreciation $      138,000.00 EBIT $    (208,250.00) Tax at 35% $      (72,887.50) NOPAT $    (135,362.50) Add: Depreciation $      138,000.00 OCF $           2,637.50 PVIFA(15,5) 3.35216 PV of OCF $           8,841.31 Initial project cost $      690,000.00 NPV $    (681,158.69)