Question
A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. Assume depreciation is straight-line to
A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are projected at 31,000 units per year, the price per unit is $47, variable cost per unit is $23, and fixed costs are $602,900 per year. The tax rate is 23 percent and the required return is 11.5 percent. Suppose the projections given for price and quantity can vary by 4 percent while variable and fixed cost estimates are accurate to within 2 percent.
a. Calculate the best-case and worst-case NPVs.
b. What is the sensitivity of NPV to changes in the sales price per unit? What is the sensitivity of NPV to changes in the variable cost per unit? Which variable has higher forecasting risk?
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