Year 0

Years 1-5

Investment

$200,000

Sales

$400,000

Variable costs@ 75%

300,000

Fixed costs

30,000

Depreciation

40,000

Pretax Profit

30,000

Taxes @ 21%

6,300

After-tax Profits

23,700

Depreciation

40,000

Cash Flows

63,700

Assume the cost of capital is 12%.

NPV = $29,624.24

4

a.) What would the net present value be if the investment turns out to

be $275,000 instead of $200,000 (assume straight line

depreciation) and would you accept the project?

b.)

Instead

, what if airline travel takes off and sales come in at

$500,000 per year (variable costs remain at 75% of sales)? What

happens to net present value?

c.)

Instead

, assume that a rival (Jet Black, Inc.) is working on a similar

project. If they can develop their product, you project that your

sales estimate will be 10% lower than originally thought and that

your variable costs will rise to 76% of sales due to higher

promotional costs. Should you go ahead with the project?