Question

We are evaluating a project that costs $788,400, has a nine-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 75,000 units per year. Price per unit is $52, variable cost per unit is $36, and fixed costs are $750,000 per year. The tax rate is 21 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 ±15 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.)

Best Case:?

Worst Case: -3569554.68

Answer 1

Here, we need to find best-case and worst-case NPV figures
Sales are projected at 75000 units per year
The projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±15 percent
Let's case other two cases as +15% from projected sales and -15% from projected sales
Sales projections would be as follows:
75000-15% of 75000=63750 units
75000+15% of 75000=86250 units
NPV=Present value of cash inflows-Initial investment
				63750 units	75000 units	86250 units
Sales revenue		($52 per unit)		3315000	3900000	4485000
Less: variable cost		($36 per unit)		2295000	2700000	3105000
Contribution margin				1020000	1200000	1380000
Less:
Fixed cost				750000	750000	750000
Depreciation		(788400/9)		87600	87600	87600
Income before taxes				182400	362400	542400
Less: Tax at 21%				38304	76104	113904
Net income				144096	286296	428496
Add: Depreciation				87600	87600	87600
Cash inflow				231696	373896	516096
Present value @12% for 9 years				5.3283	5.3283	5.3283
Present value of cash inflow				1234546	1992230	2749914
Less: Initial investment				788400	788400	788400
NPV				446146	1203830	1961514
				Worst		Best
				case		case