ELK,Inc.has compiled this information for a proposed project: sales price = $89 ±3 percent;fixed costs = $21,800 ±1 percent;variable cost per unit = $42.90 ±3 percent;sales quantity = 1,500 units ±5 percent;tax rate = 34 percent;initial investment in fixed assets = $36,500;depreciation method = straight-line to a zero book value over the project's life;project life = 4 years;salvage value of fixed assets = $0;net working capital requirement = $4,800,which will be recouped at the end of the project;discount rate = 12 percent.What is the project's net present value for the pessimistic scenario?

Question

Quizplus · Accepted Answer

OCF_Pessimistic = {(1,500 × 0.95)× [($89 × 0.97)- ($42.90 × 1.03)] - ($21,800 × 1.01)} × (1 - 0.34)+ [($36,500 / 4)× 0.34] = $28,206.11 NPV = -$36,500 - $4,800 + $28,206.11[(1 - 1 / 1.12⁴)/ 0.12] + $4,800 / 1.12⁴ = $47,422.30

ELK,IncHas Compiled This Information for a Proposed Project: Sales Price