Question
The most likely outcomes for a particular project are estimated as follows: Unit price: $50 Variable cost: $30 Fixed cost: $340,000 Expected sales: $35,000 units
The most likely outcomes for a particular project are estimated as follows: |
Unit price: | $50 | |
Variable cost: | $30 | |
Fixed cost: | $340,000 | |
Expected sales: | $35,000 | units per year |
However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.4 million, which will be depreciated straight-line over the project life to a final value of zero. The firms tax rate is 40% and the required rate of return is 14%. What is project NPV in the best-case scenario, that is, assuming all variables take on the best possible value? AND what is the "worst case scenrio? |
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