Part b

Depreciation expense per year=(Original cost-Salvage Value)/ Life

(644000-0)/8
80500
Sales Revenue =70,000unitsx$37
2590000
Variable cost =70,000 units x $21
1470000

0 1-8
Initial Investment -644,000

Sales Revenue 2590000

Variable Costs -1470000
Fixed Costs -725,000
Depreciation Costs -80500
EBT 314500
Tax[35%] -110075
Net Income 204425
Add back Depreciation 80500
Annual Cash Flow 284925 Base-case Cash Flow

NPV=284925x4.4873 - 644000
634,543.95 Ans.

Depreciation expense per year=(Original cost-Salvage Value)/ Life

(644000-0)/8
80500
Sales Revenue =69,500 x $37
2571500
Variable cost =69,500 units x $21
1459500

0 1-8
Initial Investment -644,000

Sales Revenue 2571500

Variable Costs -1459500
Fixed Costs -725,000
Depreciation Costs -80500
EBT 306500
Tax[35%] -107275
Net Income 199225
Add back Depreciation 80500
Annual Cash Flow 279725

NPV=279725x4.4873 - 644000
611209.9925

Ans: 500-unit decrease in Sales causes NPV to decrease by

23333.96

Part c
Sales Revenue =70,000 x $37
2590000
Variable cost =70,000 units x $20
1400000
0 1-8
Initial Investment -644,000

Sales Revenue 2590000

Variable Costs -1400000
Fixed Costs -725,000
Depreciation Costs -80500
EBT 384500
Tax[35%] -134575
Net Income 249925
Add back Depreciation 80500
Annual Cash Flow 330425 45500

Ans: a $1 decrease in variable cost per unit will Increase annual Cashflows by $45,500
BEST CASE SCENARIO
Depreciation expense per year=(Original cost-Salvage Value)/ Life
(644000-0)/8
80500
Units 70,000+ 10%x70000 77000
Selling price per unit: 37+ 10%x37 40.7
Variable cost per unit: 21-10%x21 18.9
Annual Fixed Cost 725000-10%x725000 652500

0 1-8
Initial Investment -644,000

Sales Revenue 3133900

Variable Costs -1455300
Fixed Costs -652,500
Depreciation Costs -80500
EBT 945600
Tax[35%] -330960
Net Income 614640
Add back Depreciation 80500
Annual Cash Flow 695140

NPV=695140x4.4873 - 644000
2,475,301.72 Ans.

WORST CASE SCENARIO

Depreciation expense per year=(Original cost-Salvage Value)/ Life
(644000-0)/8
80500
Units 70,000- 10%x70000 63000
Selling price per unit: 37- 10%x37 33.3
Variable cost per unit: 21+10%x21 23.1
Annual Fixed Cost 725000+10%x725000 797500

0 1-8
Initial Investment -644,000

Sales Revenue 2097900

Variable Costs -1455300
Fixed Costs -797,500
Depreciation Costs -80500
EBT -235400
Tax[35%] 82390
Net Income -153010
Add back Depreciation 80500
Annual Cash Flow -72510

NPV=-72510x4.4873 - 644000
(969,374.12) Ans.

Suppose Year 2
Year 1 Year 2 Cumulative
EBT -1000 1500 500
Tax[40%] 400 -600 -200

12238.9932723