Bubba Golf is considering manufacturing a new super-sized golf club to compete with the successful debut of the Holywood Smasher, produced by Koepka Industries. The initial investment for this project would include $3.0 million in new machinery and an additional $240,000 in setup costs. (The amount to be capitalized and then depreciated is the sum of the machinery and setup costs.) The project life would be 4 years; however, in accordance with the IRS, the depreciation method would be 5-year MACRS. (See page 4 for a MACRS schedule.) The relevant required return is 14% and the applicable tax rate is 34%. For simplicity, assume that a $600,000 investment in NWC is required immediately (to be recovered at the projects end) and the assets involved would have a salvage value of $108,000 (before any tax-expense implications) at the end of 4 years.

	Pessimistic	Most Likely	Optimistic
Sales (in units)	35,000	40,000	45,000
Price per unit	$290	$330	$370
Variable costs per unit	$206	$198	$190
Fixed Production Costs	$2,100,000	$1,800,000	$1,500,000
Probability of outcome	30%	50%	20%

*For simplicity, assume that the state which is realized at t=1 will be in effect for the projects duration.

MACRS Depreciation Percentages - Half-Year Convention
YEAR	5-YEAR
1	20.00%
2	32.00%
3	19.20%
4	11.52%
5	11.52%
6	5.76%
Totals	100.00%

What is the expected (i.e. probability-weighted) NPV? [Answer: 3,721,709]

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