Initial cash outlay = $ 932,000
Annual depreciation = Initial cost/Number of useful years
= $ 932,000/12 = $ 77,666.66667 or $ 77,666.67
Computation of annual cash flow (worst-case):
Price per unit ($ 39 x 0.98) |
$ 38.22 |
Less: Variable cost ( $ 26 x 1.02) |
$ 26.52 |
Contribution per unit |
$ 11.7 |
Unit sales annually (7,500 x 0.98) |
73,500 |
Total contribution |
$859,950.00 |
Less: Fixed cost ($ 778,900 x 1.02) |
$ 794,478.00 |
Operating profit |
$ 65,472.00 |
Less: Depreciation |
$ 77,666.67 |
Loss before tax |
$ (12,194.67) |
Add: Tax @ 35 % |
$ 4,268.13 |
Net loss |
$ (7,926.53) |
Add: Depreciation |
$ 77,666.67 |
Annual net cash Flow |
$ 69,740.13 |
Computation of NPV:
NPV = PV of future cash flow – Initial cash layout
= $ 69,740.13 x PVIFA (13.5 %, 12) - $ 932,000
= $ 69,740.13 x [1-(1+0.135) 12/0.135] - $ 932,000
= $ 69,740.13 x [1-(1.135) 12/0.135] - $ 932,000
= $ 69,740.13 x [(1-0.218801180917968)/0.135] - $ 932,000
= $ 69,740.13 x (0.781198819082032/0.135) - $ 932,000
= ($ 69,740.13 x 5.78665791912616) - $ 932,000
= $ 403,562.275545388 - $ 932,000
= - $ 528,437.724454612 or -$ 528,438
Worst case NPV, when cost is 2 % more and sales is 2 % less than estimated, is -$ 528,438
Hence option “-$ 528,438” is correct answer.
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