Question
A project requires an initial investment of $10,000, straight-line depreciable to zero over four years. The discount rate is 10%. Your tax bracket is 34%
A project requires an initial investment of $10,000, straight-line depreciable to zero over four years. The discount rate is 10%. Your tax bracket is 34% and you receive a tax credit for negative earnings in the year in which the loss occurs. Additional information for variables with forecast error are shown below.
| Base Case | Lower Bound | Upper Bound |
Unit Sales | 3,000 | 2,750 | 3,250 |
Price/unit | $14 | $13 | $16 |
Variable cost/unit | $9 | $8 | $10 |
Fixed costs | $9,000 | $8,500 | $10,000 |
Suppose you want to conduct a sensitivity analysis for the possible changes in unit sales. What is the IRR when the sales level equals 3,250 units? A. 32.6% B. 42.8% C. 57.9% D. 118.6% E. 121.5%
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