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c) The CFO for Keeners is concerned about developments in the future economic conditions. She thinks that there is a 30% chance of adverse economic
c) The CFO for Keeners is concerned about developments in the future economic conditions. She thinks that there is a 30% chance of adverse economic conditions, 60% chance of normal conditions and 10% chance of a substantial uplift in the economy. For each of these economic scenarios and the variations described below for each, calculate the NPV for each economic condition. Adverse Conditions Sales will 8% less than the projected 12,000 dresses for each of the first 3 years, followed by an increase of 2% compounding for the last three years. Operating costs will be 75% of sales. The selling price of each dress will be $190 for the first three years and $200 for the last three years. (8 marks) Normal Conditions Sales will be 12,000 dresses for each year, operating costs will be 68% of sales. The selling price of dresses will be $200 each. (5 marks) Optimistic Conditions Sales will be 5% higher than the projected 12,000 dresses for the first three years, then an increase of 2% compounding for the last three years. Operating costs will be 70% of sales as suppliers' cost increases are expected with the more buoyant economy. The selling price will be $200 for the first three years, increasing by 3% compounding for the last three years. (8 marks) d) What is the expected NPV (taking account of the probability of each economic scenario) (3 marks) e) Briefly discuss your results (assessing the risk) above and provide your recommendation on investing in the new sewing machine and the opportunity to add value to the company from the sales of the new dress line. (6 marks)
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