The production line would be set up in unused space in Solomons' main plant. The machinerys invoice price would be approximately $175,000, another $9,000 in shipping charges would be required, and it would cost an additional $20,000 to install the equipment. The machinery has an economic life of 4 years, and Solomons has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $20,000 after 4 years of use.

The new line would generate incremental sales of 1,150 units per year for 4 years at an incremental cost of $105 per unit in the first year, excluding depreciation. Each unit can be sold for $195 in the first year. The sales price and cost are both expected to increase by 2% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by an amount equal to 11% of sales revenues. The firms tax rate is 35%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 9%.

k. Assume that name is confident in ther estimates of all the variables that affect the projects cash flows except unit sales and sales price.

If product acceptance is poor, unit sales would be only 900 units a year and the unit price would only be $160; a strong consumer response would produce sales of 1,600 units and a unit price of $240.

name believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case).

(2.) What is the worst-case NPV? The best-case NPV? Let's use "Data Table" again, only this time we will change two inputs. Check out the comment (little red triangle corner) for directions on how to use the "Data Table" feature with two inputs.

NPV Base Case

Worst case sales price

Best case sales price

Base Case

$0

[Here]

[Here]

Units sold:

Worst case units sold:

[Here]

Sales price:

Best case units sold:

[Here]

NPV

Worst case

Best case

(3.) Use the worst-, most likely, and best-case NPVs and probabilities of occurrence to find the projects expected NPV, standard deviation, and coefficient of variation.

Scenario Analysis

Scenario

Probability

Unit Sales

Unit Price

NPV

Best Case

Base Case

Worst Case

Expected NPV =

Standard Deviation =

Coefficient of Variation = Std Dev / Expected NPV =