Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essentials Of Investments

Authors: Zvi Bodie, Alex Kane, Alan J. Marcus

8th Edition

0077606779, 978-0697789945

More Books

Students also viewed these Finance questions

Question

List the components of the strategic management process. page 77

Answered: 1 week ago