fixed cost projections given here are probably accurate to within 9 percent. 1 What are the unit sales, variable cost, and fixed cost projections of the worst case scenario? Unit sales Worst = 160 (1 - 0.09) = 145.6 units Variable cost per unit Worst = $12,000 (1 + 0.09) = $13,080 Fixed costs Worst = $283,000 (1 + 0.09) = $308,470 2 Calculate OCF of the worst case scenario? OCF Worst = [($24,000 - $13,080)(145.6) - $308,470][1 - 0.34] + 0.34($630,000/5) = $888,618.12 3 What is the worst case NPV? 4 Would it wise to take on such projects by only computing worst case scenario NPV? And why? Yes, because if NPV of the worst case is positive, then NPVs of all other scenarios will be positive.
Problem 3: Your firm has identified three potential investment projects. The projects and their cash flows are shown here:
Problem 4: Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,080,000 in annual sales, with costs of $775,000. 1- If the tax rate is 35 percent, what is the OCF for this project? 2- Suppose the required return on the project is 12 percent. What is the project’s NPV? 3- The project requires an initial investment in net working capital of $300,000, and the fixed asset will have a market value of $210,000 at the end of the project. What is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? What is the new NPV?
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- Fall '17
- DR smith