Sensitivity Analysis of Future Estimates. Yen Industries estimated the following figures on a bid for a 10 -year government contract:

\section*{Required:}
Ignoring taxes, what impacts (amount and percentage change) will the following mistakes in estimation have on the NPV of this contract?

(a) An understatement of \(\$ 20,000\) in the investment in machinery.

(b) An understatement of \(\$ 20,000\) in the inventory needed.

(c) An understatement of \(\$ 30,000\) in the cost of the overhaui.

(d) An overstatement of \(\$ 50,000\) in the salvage value at the end of the contract.

(e) An overstatement of \(\$ 4,000\) in the annual revenue from the contract.

Transcribed Image Text:

Investment in machinery... Additional inventory (funds to be released when contract ends). Cost of equipment overhaul at the end of sixth year... Machinery salvage value at the end of contract (in 10 years) Annual revenue from the contract.. Cost of capital... $800,000 100,000 120,000 80,000 200,000 14%