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Q3. (25 marks)Lower BoundExpected ValueUpper BoundSales quantity Sales price per unit Variable cost per unit Fixed...

Q3. (25 marks)Lower BoundExpected ValueUpper BoundSales quantity Sales price per unit Variable cost per unit Fixed cost95001000010500$9.75$10.00$10.25$4.80$5.20$5.60$15,000.00$18,000.00$21,000.00Initial requirement for equipment: S120,000 Depreciation: Straight-line to zero over the four-year life of the project with no salvage value. Required rate of return: 15% Marginal tax rate: 35%Calculate NPV according to best case scenario.

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Answer #1

Answer:

Best case scenario will be when:

Sales quantity is at upper bound = 10,500 units

Sales price per unit is at upper bound = $10.25

Variable cost per unit is at lower bound = $4.80

Fixed cost is at lower bound = $15,000

Initial investment = $120,000

Annual depreciation = 120000 / 4 = $30,000

Annual Cash flows = ((Sales price - Variable cost per unit)* sales quantity - Fixed cost) * (1 - tax rate) + Depreciation * Tax rate

= ((10.25 - 4.80)* 10500 - 15000) *(1- 35%) + 30000 * 35%

= $37946.25

Best case NPV = Annual cash flow * PV factor for annuity - Initial Investment

= 37946.25 *((1 - 1 /(1+15%)^4)/15%) - 120000

= -11664.28

NPV according to best case scenario = -$11,664.28 or ($11,664.28)

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