9. Scenario analysis (S10.1) You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows:

a. Expected sales: 30,000 units per year

b. Unit price: $50 294 Part Three Best Practices in Capital Budgeting

c. Variable cost: $30

d. Fixed cost: $300,000 The project will last for 10 years and requires an initial investment of $1 million, which will be depreciated straight-line over the project life to a final value of zero. The firm’s tax rate is 30%, and the required rate of return is 12%.

However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $40. The good news is that fixed costs could be as low as $200,000, and variable costs would decline in proportion to sales.

a. What is project NPV if all variables are as expected?

b. What is NPV in the bad-case scenario?