Question
Odion Manufacturers Ltd is evaluating a project that costs $280000, has a seven-year life, and no salvage value. Assume that depreciation is prime cost to
Odion Manufacturers Ltd is evaluating a project that costs $280000, has a seven-year life, and no salvage value. Assume that depreciation is prime cost to zero salvage over the 7 years. Odion requires a return of 10 per cent on such projects. The tax rate is 30 per cent. Sales are projected at 60000 units per year. Price per unit is $23.80, variable cost per unit is $10.52 and fixed costs are $100000 per year.
Calculate the base-case cash flow and NPV. Suppose that you think that the sales projection is accurate only to within 25 per cent. Evaluate the sensitivity of NPV to changes in that projection.
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