Problem 11-6 Scenario Analysis [LO2] We are evaluating a project that costs $924
ID: 2622437 • Letter: P
Question
Problem 11-6 Scenario Analysis [LO2]
We are evaluating a project that costs $924,000, has an eight-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 $46, variable cost per unit is $31, and fixed costs are $825,000 per year. The tax rate is 35 percent, and we require a 15 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within
We are evaluating a project that costs $924,000, has an eight-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 $46, variable cost per unit is $31, and fixed costs are $825,000 per year. The tax rate is 35 percent, and we require a 15 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within
Explanation / Answer
NPV best case = -924,000+335363.5*PVIFA(15,8) = -924,000+335363.5*4.4873 = $580876.63
NPV worst case = -924,000+150112.5*PVIFA(15,8) = -924,000+150112.5*4.4873 = -$250400.178
SCEnerio units sale unit price unit VC Fixed cost (million) depreciation per year before tax profit after tax Profit cash flow per year Base 75000 46 31 825000 115500 184500 119925 235425 best 82500 50.6 34.1 907500 115500 338250 219862.5 335362.5 worst 67500 41.4 27.9 742500 115500 53250 34612.5 150112.5