The project will cost $990,000, have a four-year life, and have no salvage value; depreciation is...
Question:
The project will cost $990,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 320 units per year; the price per unit will be $19,400, the variable cost per unit will be $15,900, and the fixed costs will be $330,000 per year. The required return on the project is 14 percent, and the relevant tax rate is 30 percent.
Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within {eq}\pm {/eq} 10 percent.
What are the best and worst-case NPVs with these projections?
Net Present Value (NPV):
NPV assists in appraising the present-day's value of any project with the upcoming monetary payments. The assessed value, if positive, depicts that decision-makers must accept the project, and if negative, decision-makers must reject the offer.
Answer and Explanation: 1
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View this answerA) Best case NPV:
Given:
| Sales | 320 units |
| Sale price | $19,400 |
| Tax rate | 30% |
| Depreciation ($990,000/4) | $247,500 |
Calculating operating cash flow:
{eq}\be...
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