Question

We are evaluating a project that costs $841,000, has a life of fourteen years, and has no salvage value. assume that depreciation is straight-line to zero over the life of the project. sales are projected at 137,000 units per year. price per unit is $38, variable cost per unit is $25, and fixed costs are $854,456 per year. the tax rate is 23 percent, and we require a return of 15 percent on this project. the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +₋ 10 percent.

Calculate the best-case and worst-case NPV figures. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

To calculate the best-case and worst-case NPV figures, calculate the cash flows for each year by subtracting the variable costs from the sales revenue per unit, deducting the fixed costs, and discounting the net cash flows back to present value. The best-case NPV is obtained by assuming the high end of projected sales volume and price, and the low end of variable costs and fixed costs. The worst-case NPV is obtained by assuming the low end of projected sales volume and price, and the high end of variable costs and fixed costs.

Step-by-step explanation:

To calculate the best-case and worst-case NPV figures, we need to calculate the cash flows for each year of the project and discount them back to present value. The cash flow for each year can be calculated by subtracting the variable cost per unit from the sales revenue per unit and multiplying it by the projected sales volume. The fixed costs should be deducted from the total cash flow to get the net cash flow. Then, we can calculate the NPV by discounting the net cash flow for each year by the required return rate and summing them up. The best-case NPV is obtained by using the high end of the projected sales volume and price per unit, and the low end of the variable cost per unit and fixed costs. The worst-case NPV is obtained by using the low end of the projected sales volume and price per unit, and the high end of the variable cost per unit and fixed costs.

Using the given information, here are the calculations:

• For the best-case NPV:

1. Calculate the cash flow for each year:
2. Calculate the NPV:
3. Round the calculated NPV to 2 decimal places.

For the worst-case NPV:

1. Calculate the cash flow for each year:
2. Calculate the NPV:
3. Round the calculated NPV to 2 decimal places.