Extensive Enterprise Inc. is considering opening a new division to produce units that it expects to sell at a price of $12,990 each in the first year of the project. The company expects the cost of producing each unit to be $6,700 in the first year; however, it expects the selling price and cost per unit to increase by 4% each year.

1. Based on the preceding information, the company expects the selling price in the fourth year of the project to be _____________ , and it expects the cost per unit in the fourth year of the project to be ________________ .

2. Which of the following statements about inflations effect on net present value (NPV) is correct?

A. When the selling price and cost per unit are expected to increase at the same rate, you do not need to take inflation into account when performing a capital budgeting analysis.

B. When the selling price and cost per unit are expected to increase at the same rate, forgetting to take inflation into account in a capital budgeting analysis will typically cause the estimated NPV to be lower than the true NPV.

Mina is a risk analyst. She is conducting a sensitivity analysis to evaluate the riskiness of a new project that her company is considering investing in. Her risk analysis report includes the sensitivity curve shown on the graph.

3. This curve implies that the project is very sensitive to changes in units sold. The projects NPV is likely to become negative if the number of units sold decreases by _______%

Along with the sensitivity analysis, Mina is including a scenario analysis for the project in her report, giving the probability of the project generating a negative NPV. Her report includes the following information about the scenario analysis:

	Data Collected
Outcome	NPVjNPV	Probability (Pj)
Pessimistic	$5.62 million	0.35
Most likely	$7.94 million	0.30
Optimistic	$16.45 million	0.35

Complete the missing information in Minas report:

4. The expected net present value of the project is _________ .

5. Standard deviation of the net present value (the NPV of the project is likely to vary by) __________ million.

Mina is a risk analyst. She is conducting a sensitivity analysis to evaluate the riskiness of a new project that her company is considering investing in. Her risk analysis report includes the sensitivity curve shown on the graph