Question:

Consider a project to supply your church with 55,000gallons of hand sanitizer annually for church services. You estimate that you will need an initial Gh¢4,200,000 in terms of investment to get the project started. The project will last for 5years.

The project will bring in annual cashflows of Gh¢1,375,000. It also estimates a salvage value of Gh¢300,000 after dismantling costs.

Your cost of capital is13percent. Assume no taxes or depreciation.

Required:

a) What is the NPV of the sanitizer project? Should you pursue this project?

b) Suppose you believe that there is a best-case scenario where initial

investment could be 15% lower with salvage value and revenue being 10% higher, what would be the NPV under this scenario?      

c)In the worst-case scenario, you expect annual cash inflows to be 10% lower, salvage value to be 12% lower and initial investment to be 10% higher. Calculate the NPV under this worst-case scenario. Would you still pursue the project?                                                                                         

d)You just received additional information that suggests that your base case (answer to a), best-case(b) and worst-case(c) scenarios have probabilities of 0.35,0.35 and 0.30 respectively. What will be the expected NPV of the sanitizer project? What about the standard deviation of the sanitizer project?

Do you think the project is still viable?