Question

We are evaluating a project that costs $2,040,000, has a life of 7 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 89,700 units per year. Price per unit is $38.67, variable cost per unit is $23.80, and fixed costs are $851,000 per year. The tax rate is 22 percent, and we require a return of 12 percent on this project.
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.

Answer 1

Answer: best case Nvp $2,943,304,509.57

Worse case NVP

-$2, 601,609,39

Answer 2

Answer:

The best case NPV gives $2,943,309.57  

The worst case NPV gives ($2,601,609.39)

Explanation:

In calculating the NPVs in the attached excel file, the following points should be noted:

Under the best case the +10% is added to price and volume while -10% is applied to costs

Under the worst case NPV -10% is applied to price and volume while +10% was applied to costs

Under both scenarios,depreciation was deducted earlier in order to calculate tax appropriately,but later added to net income in order calculate net cash flows since depreciation is not a cash flow.

In calculating the present of cash flows the pv formula in excel was used.

Finally NPV is present value cash flow less initial investment.

Download xlsx