Question
The most likely outcomes for a particular project are estimated as follows: Sales $1,500,000 Variable costs $1,000,000 Fixed costs $400,000 (excluding depreciation) However, you recognize
The most likely outcomes for a particular project are estimated as follows: Sales $1,500,000 Variable costs $1,000,000 Fixed costs $400,000 (excluding depreciation) 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 $1,000,000, 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 12%. a. What is project NPV in the best case scenario, that is, assuming all variables take on the best possible value?
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