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Homework answers / question archive / Green Gardens is analyzing a proposed 5-year project that requires an investment of $77, 000 in fixed assets and $17,400 in net working capital
Green Gardens is analyzing a proposed 5-year project that requires an investment of $77, 000 in fixed assets and $17,400 in net working capital. The company uses straight-line depreciation over a project's life. Sales are estimated at 24,000 units ±3 percent. The expected variable cost per unit is $17, and the expected fixed costs are $39,000. The fixed and variable cost estimates are considered accurate within a range of ±2 percent. The sales price is estimated at $36 a unit, ±1 percent. The discount rate is 16 percent, and the tax rate is 35 percent. What is the net income under the pessimistic case scenario?
Computation of Net Income under the Pessimistic Case Scenario:
Net Income = [Sales Revenue - Variable Costs - Fixed Costs - Depreciation] * (1 - Tax Rate)
Here,
Sales Revenue = 24,000 units*(1-3%)*$36*(1-1%) = $829,699.20
Variable Cost = 24,000 units*(1-3%)*$17*(1+2%) = $403,675.20
Fixed Costs = $39,000*(1+2%) = $39,780
Annual Depreciation = Initial Investment / Useful Life = $77,000 / 5 = $15,400
Tax Rate = 35%
Net Income = [$829,699.20 - $403,675.20 - $39,780 - $15,400] * (1 - 0.35)
= $370,844 * 0.65
Net Income = $241,048.60
