Consider a project with a 6-year life. The initial cost to set up the project is $100,000. This amount is to be linearly depreciated to zero over the life of the project and there is no salvage value. The required return is 10% and the tax rate is 34%.

The price per unit is $50, variable costs are $20 per unit and fixed costs are $30,000 per year. You've collected the following estimates for unit sales:

	Base case	Pessimistic	Optimistic
Unit sales per year (Q)	6,000	4,000	8,000

Attempt 1/5 for 10 pts.

Part 1

What is the NPV in the base case?

Correct

Variable	Calculation	Amount
Sales	Q*P	300,000
- Variable costs	Q*VC	120,000
- Fixed costs	FC	30,000
- Depreciation	100,000/6	16,667
= EBIT		133,333
- Taxes	EBIT*0.34	45,333
+ Depreciation		16,667
= SOCF		104,667
- Equip. cost		0
- Change in NWC		0
= CF		104,667

Since the cash flow is contant for 6 years, we can use the annuity formula:

NPV=100,000+104,6670.1(111.16)= 355,851

Part 2

What is the NPV in the pessimistic case?

Part 3

What is the NPV in the optimistic case?