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XYZ Inc is looking at a project to manufacture widgets. Assume we have the following data: - The initial cost of the project is $1,300,000.
XYZ Inc is looking at a project to manufacture widgets. Assume we have the following data: - The initial cost of the project is $1,300,000. - The project is expected to last 6 years, at which time the project will be abandon. - Assume each widget will cost $10.00 each to produce and the selling price will be $18.00. Production fixed costs are expected to be $325,000 annually. - The company has computed that the PVCCATS associated with this project will be $247,000. Also, the company uses a discount rate of 14% for capital projects and XYZ pays tax at a rate of 5%. XYZ is unsure as to how many widgets they will sell annually. The marketing department has provided that the expected number of units sold annually, N is E(N)=77,000 units with a standard deviation of =8,000 units. (a) Compute the expected NPV, E(NPV) of this project. (b) Compute the standard deviation of the NPV of this project. (c) Compute the NPV breakeven point of this project. units. (d) Based on the expected NPV calculation, should XYZ Inc proceed with this project? Yes No
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