Question
You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has
You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for six years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 13 percent and the company has a 21 percent tax rate.
Pessimistic | Expected | Optimistic | |
---|---|---|---|
Market size | 90,000 | 100,000 | 112,000 |
Market share | 20% | 23% | 25% |
Selling price | $ 149 | $ 153 | $ 157 |
Variable costs per unit | $ 82 | $78 | $ 75 |
Fixed costs per year | $ 980,000 | $ 925,000 | $ 885,000 |
Initial investment | $ 2,200,000 | $ 2,050,000 | $ 1,950,000 |
Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit.
NPV | |
Pessimistic | |
Expected | |
Optimistic |
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