You are considering to purchase a machine that costs $100,000. Its value depreciates to

zero using straight-line depreciation scheme over 4 years; you expect the salvage value to

be $10,000 after 4 years. This machine is going to generate an increase in sales of 3,000

units. A unit price and cost are $30 and $10, respectively. An additional fixed cost of

operating this machine is $5,000. Tax rate is 35%. The discount rate is 12%. There will

not be any changes in net working capital.

a. Evaluate NPV of this idea. Should you buy this machine? (6 points)

b. Suppose that you want to do scenario analysis to make sure that your decision is right.

You expect that unit price might fluctuate between $25 and $35. You also think that unit

sales might be go as low as 2,700 and as high as 3,500. Finally, fixed costs might go up

to $5,500 and down to $4,500. Assuming that everything else stays the same, what is the

NPV in the worst case? (6 points)