Question

a project that costs $2,160,000, has a 8-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 90,900 units per year. Price per unit is $38.91, variable cost per unit is $24.00, and fixed costs are $863,000 per year. The tax rate is 21 percent, and we require a return of 11 percent on this project. a. Calculate the base-case operating cash flow and NPV.

Answer 1

The base-case operating cash flow for the project is $2,913,039 and the NPV is $557,324.74.

Step-by-step explanation:

To calculate the base-case operating cash flow, we need to subtract the variable costs per unit from the price per unit and then multiply the result by the number of units sold. The fixed costs are then subtracted from this result. The base-case operating cash flow is calculated as follows:

Base-case operating cash flow = (Price per unit - Variable cost per unit) × Number of units - Fixed costs

Using the given values, the base-case operating cash flow is ($38.91 - $24.00) × 90,900 - $863,000 = $2,913,039.

To calculate the NPV, we need to discount the future cash flows to their present value. The formula for NPV is:

NPV = Base-case operating cash flow - Initial investment / (1 + Discount rate) ^ Number of years

The initial investment is $2,160,000, the discount rate is 11%, and the number of years is 8. Plugging these values into the NPV formula, we get:

NPV = $2,913,039 - $2,160,000 / (1 + 0.11) ^ 8 $557,324.74.