Question
You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales:
You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows:
Expected sales: 120,000 units per year
Unit price: $230
Variable cost: $138
Fixed cost: $5,160,000
The project will last for 10 years and requires an initial investment of $19.24 million, which will be depreciated straight-line over the project life to a final value of zero. The firms tax rate is 30%, and the required rate of return is 12%.
However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $220. The good news is that fixed costs could be as low as $3,440,000, and variable costs would decline in proportion to sales.
A) What is project NPV if all variables are as expected?
B) What is NPV in the bad-case scenario?
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