A-16 Appendix A Solutions to Self-Test Questions and Problems
NPV! "$67,000 # $19,380/(1.11)^1 # $22,500/(1.11)^2 # $24,520/(1.11)^3
! "$13,350Alternatively, using a! nancial calculator, you would enter CF 0! "67000,
CF 1! 19380, CF 2! 22500, CF 3! 24520, and I/YR! 11 and then solve for
NPV! "$13,350.
Since the NPV is negative, the project should not be accepted. If unit sales were
20% below the forecasted level, the project would no longer be accepted.
f. Best-case scenario: Unit sales! 4,800, Variable cost %! 65%Year 0 Year 1 Year 2 Year 3
Equipment purchase ($65,000)
Change in NWC (2,000)
Revenues (4,800 $ $50) $240,000 $240,000 $240,000
Variable costs (65%) 156,000 156,000 156,000
Fixed costs 30,000 30,000 30,000
Depreciation 21,450 29,250 9,750
EBIT $ 32,550 $ 24,750 $ 44,250
Taxes (40%) 13,020 9,900 17,700
AT operating income $ 19,530 $ 14,850 $ 26,550
Add back: Depreciation 21,450 29,250 9,750
Salvage value 10,000
Tax on salvage value (2,180)
Recovery of NWC 2,000
Project cash flows ($67,000) $ 40,980 $ 44,100 $ 46,120!67,000 40,980 44,100 46,120
0
Project NPV:
11%^123NPV! "$67,000 # $40,980/(1.11)^1 # $44,100/(1.11)^2 # $46,120/(1.11)^3
! $39,434
Alternatively, using a! nancial calculator, you would enter CF 0! " 67000
CF 1! 40980, CF 2! 44100, CF 3! 46120, and I/YR! 11 and then solve for
NPV! $39,434.
Base-case scenario: The NPV was calculated in Part d as $4,245.
Worst-case scenario: Unit sales! 3,200, Variable cost %! 75%Year 0 Year 1 Year 2 Year 3
Equipment purchase ($65,000)
Change in NWC (2,000)
Revenues (3,200 $ $50) $ 160,000 $ 160,000 $160,000
Variable costs (75%) 120,000 120,000 120,000
Fixed costs 30,000 30,000 30,000
Depreciation 21,450 29,250 9,750
EBIT ($ 11,450) ($ 19,250) $ 250
Taxes (40%) (4,580) (7,700) 100
AT operating income ($ 6,870) ($ 11,550) $ 150
Add back: Depreciation 21,450 29,250 9,750
Salvage value 10,000
Tax on salvage value (2,180)
Recovery of NWC 2,000
Project cash flows ($67,000) $ 14,580 $ 17,700 $ 19,720