Question

URGENTTT

The most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: Expected sales: 80 68 $280,eee 30,eee units per year However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 5% higher or 5% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.0 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 21% and the required rate of return is 10 % (For all the requirements, a negative amount should be indicated by a minus sign. Enter your answer In dollars not In milions. Do not round Intermedlate calculations. Round your answer to the nearest dollar amount.) a. What is project NPV in the best-case scenario, that is, assuming all variables take on the best possible value? b. What is project NPV in the worst-case scenario? NPV a. b. NPV

Answer 1

a

Time line		0	1	2	3	4	5	6	7	8	9	10
Cost of new machine		-1000000
=Initial Investment outlay		-1000000
													100.00%
Unit sales			31500	31500	31500	31500	31500	31500	31500	31500	31500	31500
Profits	=no. of units sold * (sales price - variable cost)		850500	850500	850500	850500	850500	850500	850500	850500	850500	850500
Fixed cost			-266000	-266000	-266000	-266000	-266000	-266000	-266000	-266000	-266000	-266000
-Depreciation	Cost of equipment/no. of years		-100000	-100000	-100000	-100000	-100000	-100000	-100000	-100000	-100000	-100000	0	=Salvage Value
=Pretax cash flows			484500	484500	484500	484500	484500	484500	484500	484500	484500	484500
-taxes	=(Pretax cash flows)*(1-tax)		382755	382755	382755	382755	382755	382755	382755	382755	382755	382755
+Depreciation			100000	100000	100000	100000	100000	100000	100000	100000	100000	100000
=after tax operating cash flow			482755	482755	482755	482755	482755	482755	482755	482755	482755	482755
+Tax shield on salvage book value	=Salvage value * tax rate											0
=Terminal year after tax cash flows												0
Total Cash flow for the period		-1000000	482755	482755	482755	482755	482755	482755	482755	482755	482755	482755
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331	1.4641	1.61051	1.771561	1.9487171	2.1435888	2.357948	2.593742
Discounted CF=	Cashflow/discount factor	-1000000	438868.1818	398971.0744	362700.9767	329728.16	299752.87	272502.61	247729.6474	225208.77	204735.2	186123
NPV=	Sum of discounted CF=	1966320.49

b

Time line 10 Cost of new machine -1000000 =Initial Investment outlay -1000000 Unit sales Profits Fixed cost =no. of units sold * (sales price - varii 28500 370500 -294000 28500 370500 -294000 28500 370500 -294000 28500 370500 -294000 28500 370500 -294000 28500 370500 -294000 28500 370500 -294000 28500 28500 28500 370500 370500 370500 -294000 -294000 -294000 -Depreciation Cost of equipment/no. of years -100000 -100000 -100000 100000 100000 100000 -100000 100000 -100000 -100000 -23500 =(Pretax cash flows)*(1-tax) =Pretax cash flows taxes +Depreciation =after tax operating cash flow -23500 -18565 100000 81435 -23500 -18565 100000 81435 -23500 -18565 100000 81435 -23500 -18565 100000 81435 -23500 -18565 100000 81435 -23500 -18565 100000 81435 -23500 -18565 100000 81435 -23500 -18565 100000 81435 -23500 -18565 100000 81435 100000 81435 =Salvage value * tax rate +Tax Shield on salvage book value =Terminal year after tax cash flows Total Cash flow for the period Discount factor= Discounted CF= NPV= (1+discount rate Cashflow/discou Sum of discount -1000000 81435 81435 81435 1.1 1.21 1.331 -1000000 74031.8182 67301.6529 61183.3208 -499617.18 81435 81435 81435 81435 81435 81435 81435 1.4641 1.61051 1.771561 1.9487171 2.143589 2.35795 2.59374 55621.2 50564.73 45967.93 41789.0314 37990.03 34536.4 31396.7