Answer:
<u>base scenario:</u>
initial outlay = $786,000
depreciation expense per year = $786,000 / 8 = $98,250
contribution margin per unit = $48 - $25 = $23
total units sold per year = 65,000
fixed costs per year = $725,000
tax rate = 22%
NCF year 0 = -$786,000
NCF year 1-8 = {[($23 x 65,000) - $98,250 - $725,000] x 0.78} + $98,250 = $622,215
NPV = $2,533,471.10
IRR = 78%
<u>best case scenario:</u>
initial outlay = $786,000
depreciation expense per year = $786,000 / 8 = $98,250
contribution margin per unit = ($48 x 110%) - ($25 x 90%) = $30.30
total units sold per year = 65,000 x 110% = 71,500
fixed costs per year = $725,000 x 90% = $625,500
tax rate = 22%
NCF year 0 = -$786,000
NCF year 1-8 = {[($30.30 x 71,500) - $98,250 - $625,500] x 0.78} + $98,250 = $1,223,556
NPV = $5,741,580.96
IRR = 156%
<u>worst case scenario:</u>
initial outlay = $786,000
depreciation expense per year = $786,000 / 8 = $98,250
contribution margin per unit = ($48 x 90%) - ($25 x 110%) = $15.70
total units sold per year = 65,000 x 90% = 58,500
fixed costs per year = $725,000 x 110% = $797,500
tax rate = 22%
NCF year 0 = -$786,000
NCF year 1-8 = {[($15.70 x 58,500) - $98,250 - $797,500] x 0.78} + $98,250 = $172,116
NPV = $132,226.16
IRR = 14%
