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: 80,000 units per year
Unit price: $150
Variable cost: $90
Fixed cost: $3,000,000
The project will last for 10 years and requires an initial investment of $5.72 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 $140. The good news is that fixed costs could be as low as $2,000,000, and variable costs would decline in proportion to sales.
What is project NPV if all variables are as expected?
Note: Do not round intermediate calculations. Enter your answer in thousands not in millions and round your answer to the nearest whole dollar amount.
What is NPV in the bad-case scenario?
Note: Do not round intermediate calculations. Enter your answer in thousands not in millions and round your answer to the nearest whole dollar amount. Negative amount should be indicated with a minus sign.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started