The most likely outcomes for a particular project are estimated as follows: Howe
ID: 2475357 • Letter: T
Question
The most likely outcomes for a particular project are estimated as follows: However, you recognize that some of these estimates are subjdect to error. Suppose that each variable may tum out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.8 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 40% and the required rate of return is 10%/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?Explanation / Answer
(a) (b) Best Case Worst Case Sl No Particulars Operation Initial Estimate With 10% higher With 10% lower 1 Unit Sale Price 60 66 54 2 Variable Cost 40 44 36 3 Fixed Cost 390000 429000 351000 4 Expected Sales per year 38000 41800 34200 5 Contribution per unit Sl no 1 - Sl no 2 20 22 18 6 Total Contribution Sl no 5 * Sl no 4 760000 919600 615600 7 PBT Sl no 6 - Sl no 3 370000 490600 264600 8 Tax (@40%) Sl no 6 * 40% 148000 196240 105840 9 PAT Sl no 7 - Sl no 8 222000 294360 158760 10 Depreciation (SL) 1800000/10 180000 180000 180000 11 Taxshield on Depreciation Sl no 10 * 40% 72000 72000 72000 12 Cash inflow Sl no 11 + Sl no 9 294000 366360 230760 13 Annuity factor @ 10% for 10 years 6.145 6.145 6.145 14 Total Present value of cash inflows Sl no 13 * Sl no 12 1806630 2251282 1418020 15 Present outflow 1800000 1800000 1800000 16 Net Present Value (NPV) 6630 451282 -381980