Peabody Corporation has the following basecase estimates for its new small engine assembly project Price per unit $500 Variable costs $120 per unit Fixed costs $2 5 million Demand 20,000 units per year Capital investment $8 million at year 0 Product life 8 years Salvage value $500,000 Depreciation ...

a Base case scenario b Best case scenario c Worst case scenario d We see that the base case produces ...

Peabody Corporation has the following basecase estimates for its new small engine assembly project: Price per unit

Question:

Peabody Corporation has the following base‐case estimates for its new small engine assembly project:

Price per unit = $500
Variable costs = $120 per unit
Fixed costs = $2.5 million
Demand = 20,000 units per year
Capital investment = $8 million at year 0
Product life = 8 years
Salvage value = $500,000
Depreciation method = seven‐year MACRS
Tax rate = 35%
MARR = 12%

Suppose the company believes that all of its estimates (except the product life, depreciation method, tax rate, and MARR) are accurate only to within ;20%.
(a) What is the NPW of the project based on its base‐case scenario?
(b) What is the NPW of the project based on its best‐case scenario?
(c) What is the worst‐case scenario?
(d) What conclusion would you make about the project after seeing the scenario analyses?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...

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