Question
Suppose that a company is considering an investment in a new product with a 5-year horizon (product will be sold for 5 years). The upfront
Suppose that a company is considering an investment in a new product with a 5-year horizon (product will be sold for 5 years). The upfront investment is $1 million and it is assumed to depreciate on a straight-line basis for 5 years, with no residual value. Fixed costs are assumed to be $50,000 per year. The company estimates the variable cost per unit (v) to be $5 and expects to sell each unit for $15. There are no taxes and the required rate of return is 8% per year. The company estimates that they will be able to sell 32,000 units during the year under normal circumstances (base case), but they believe that actual sales could be 10% lower than 32,000 (worst case) or 10% higher than 32,000 (best case).
Base Case NPV = Worst Case NPV = Best Case NPV =
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