Problem 12-3

Keener Clothiers Inc. is considering investing $2 million in an automatic sewing machine to produce a newly designed line of dresses. The dresses will be priced at $200, and management expects to sell 12,000 per year for six years. There is, however, some uncertainty about production costs associated with the new machine. The production department has estimated operating costs at 70% of revenues, but senior management realizes that this figure could turn out to be as low as 65% or as high as 75%. The new machine will be depreciated at a rate of $200,000 per year (straight line, zero salvage). Keener's cost of capital is 16%, and its marginal tax rate is 39%. Calculate a point estimate along with best- and worst-case scenarios for the project's NPV. Round the answers to the nearest dollar.

Best-case scenario. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. $ Point estimate. Use a minus sign to indicate a negative NPV. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. $ Worst-case scenario. Use a minus sign to indicate a negative NPV. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. $