The Can-Do Co. is analysing a proposed project. The company expects to sell 12,0
ID: 2733586 • Letter: T
Question
The Can-Do Co. is analysing a proposed project. The company expects to sell 12,000 units, plus or minus 4 percent. The expected variable cost per unit is $7 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6 percent range. The depreciation expense is $30,000 per year, over the 5 year life of the project, using the straight line. The tax rate is 34 percent. The sale price is estimated at $14 a unit, plus or minus 5 percent.
What is the NPV under the base case scenario if required rate of return is 12%?
Explanation / Answer
Variables under base case scenario:
1. Units sold = 12000 units
2. Variable cost p.u. = $7
3. Fixed cost = $36000
4. Depreciation expense = $30000
5. SP per unit = $14
6. Cash flows per year = [(SP-VC) x No. of units sold - FC] x (1-tax rate) + [Depreciation x Tax rate]
= [(14-7) x 12000 - 36000] x (1-0.34) + [30000 x 0.34]
= 31680 + 10200
= $41880
7. NPV = 41880 x Cumulative PVF@12% for 5 years
= 41880 x 3.6047....
= $150968.03