Answer:
Best-Case Worst-Case
NPV NPV
PV of cash inflows $2,897,706 $3,187,477
PV of project cost $1,680,000 $1,848,000 ($1,680,000 * 1.1)
NPV $1,217,706 $1,339,477
Explanation:
a) Data and Calculations:
Initial project cost = $1.68 million
Project's estimated life = 6 years
Salvage value = $0
Depreciation expense = $280,000 ($1.68 million/6)
Income Statement:
Sales revenue (90,000 * $37.95) = $3,415,500
Cost of goods sold:
Variable cost (90,000 * $23.20) = 2,088,000
Gross profit = $1,327,500
Fixed costs = 815,000
Income before tax = $512,500
Income tax (21% of $512,500) = 107,625
Net income = $404,875
Add depreciation expense 280,000
Annual cash inflows = $684,875
PV annuity factor for 6 years at 11% = 4.231
PV of annual cash inflows of $684,875= $2,897,706 ($684,875 * 4.231)
Annual cash inflows = $753,363 ($684,875 * 1.1)
PV of annual cash inflows of $753,363 = $3,187,477 ($753,363 * 4.231)
