As a financial analyst, you must evaluate a proposed project to produce printer cartridges. The purchase price of the equipment, including installation, is $65,000, and the equipment will be fully depreciated at t = 0. Annual sales would be 4,000 units at a price of $50 per cartridge, and the projects life would be 3 years. Current assets would increase by $5,000 and payables by $3,000. At the end of 3 years, the equipment could be sold for $10,000. Variable costs would be 70% of sales revenues, fixed costs would be $30,000 per year, the marginal tax rate is 25%, and the corporate WACC is 11%.

A. Management is uncertain about the exact unit sales. What would the projects NPV be if unit sales turned out to be 20% below forecast, but other inputs were as forecasted? Would this change the decision?

NPV = $

Accept or Reject?

B. The CFO asks you to do a scenario analysis using these inputs:

Scenario	Probability	Unit Sales	VC%
Best case	25%	4,800	65%
Base case	50	4,000	70
Worst case	25	3,200	75

Other variables are unchanged.

What are the expected NPV, its standard deviation, and the coefficient of variation? (Hint: To do the scenario analysis, you must change unit sales and VC% to the values specified for each scenario, get the scenario cash flows, and then find each scenarios NPV. Then you must calculate the projects expected NPV, standard deviation (), and coefficient of variation (CV).

• NPV Best Case Scenario = $ .
• NPV Base Case Scenario = $ .
• NPV Worst-case Scenario = - $ .
• Expected NPV = $
• Standard deviation of NPV = $
• Coefficient of variation of NPV =

C. The firms project CVs generally range from 1.0 to 1.5. A 3% risk premium is added to the WACC if the initial CV exceeds 1.5, and the WACC is reduced by 0.5% if the CV is 0.75 or less. Then a revised NPV is calculated.

What WACC should be used for this project when project risk has been properly considered?

Note: answer is a percentage, enter only the number

D. The firms project CVs generally range from 1.0 to 1.5. A 3% risk premium is added to the WACC if the initial CV exceeds 1.5, and the WACC is reduced by 0.5% if the CV is 0.75 or less. Then a revised NPV is calculated.

What are the revised values for the NPV?

• NPV Best Case Scenario = $ .
• NPV Base Case Scenario = $ .
• NPV Worst-case Scenario = -$ .
• Expected NPV = $

E. The firms project CVs generally range from 1.0 to 1.5. A 3% risk premium is added to the WACC if the initial CV exceeds 1.5, and the WACC is reduced by 0.5% if the CV is 0.75 or less. Then a revised NPV is calculated.

What are the revised values for standard deviation, and coefficient of variation?

• Standard deviation of NPV = $
• Coefficient of variation of NPV =

F. The firms project CVs generally range from 1.0 to 1.5. A 3% risk premium is added to the WACC if the initial CV exceeds 1.5, and the WACC is reduced by 0.5% if the CV is 0.75 or less. Then a revised NPV is calculated.

Would you recommend that the project be accepted?

Group of answer choices

Accept project

Reject project