Purchase Solution

Change in NPV

Not what you're looking for?

Ask Custom Question

Rocky Top Car Wash is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over the project's 3-year life, and would have zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. This is just one project for the firm, so any losses can be used to offset gains on other firm projects. If the number of cars washed declined by 50% from the expected level, by how much would the project's NPV change? (Hint: Cash flows are constant in Years 1-3.)

WACC 10.0%
Net investment cost (depreciable basis) $60,000
Number of cars washed 2,800
Average price per car $25.00
Fixed op. cost excl. depr'n $10,000
Variable op. cost/unit (i.e. per car washed) $5.357
Annual depreciation $20,000
Tax rate 35.0%

a. $36,207
b. $38,113
c. $40,119
d. $42,230
e. $44,453

Purchase this Solution
Solution Summary

The solution explains how to calculate the change in NPV when there is a change in one of the variables

Solution Preview

Please see the attached file.

Given Situation
Cash Washes 2,800 2,800 2,800
Price 25 25 25
Variable cost 5 5 5
Income before depreciation 45,000 45,000 45,000 ...

Purchase this Solution
Free BrainMass Quizzes
Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Operations Management

This quiz tests a student's knowledge about Operations Management

View More Free Quizzes
Related BrainMass Solutions

  • Change in NPV

    in NPV given a change in WACC

  • Internal rate of return using interpolation

    IRR is the rate at which the NPV=0. In the interpolation method, we find the NPV at different rates till we get one NPV as positive and one NPV as negative. This would imply that IRR would be in-between these rates since at IRR the NPV=0.

  • Differences / similarities - sensitivity & scenario analysis

    Key variables are those which when change, the NPV changes by a large magnitude. We make a table of percentage change in variable versus percentage change in NPV.

  • Change in NPV: Changed WACC

    2 + 540/1.1^3 = 1,290.01 NPV = 1,290.01-1,000 = 290.01 Change in NPV = 362.28-290.01 = $72.27

  • WACC

    By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected.

  • NPV vs Sales

    The graph of NPV vs. Sales shows the changes in NPV when sales changes. If the slope is steep, it means that the rate of change of NPV with sales is large. A small increase (decrease) in sales causes a large increase (decrease) in NPV.

  • Lasik Vision's WACC: Differences in Forecasting

    However, the CFO wants to reconsider this and all other proposed projects in view of the Federal action. How much did the changed WACC cause the forecasted NPV to change?

  • Sussex LLC - NPV of Cash Flows

    Reynolds should accept this offer because the NPV of her cash flows with the change in her allocation percentages is higher than the NPV without the change in her allocation percentages by 5,276.07.

  • NPV, IRR and Profitability Index

    When the rate changes by 2% (10% to 12%) the NPV changes by 9,902-(-649) = 10,551. We need a NPV change of 9,902 since that would make the NPV zero.

View More Related Solutions