you have been hired as a financial analyst by a company retail stores and have been asked to create a cash flow model to determine if they should make a capital investment to increase the security for customers paying company has been losing business to a competitor who has recently installed a similar new security system and your company hopes to gain back the business

- the forecast is for an increase of 2,000,000$ units in year 1, 500,000 units in year 2 and 3,000,000 in year three

- the average selling price is 25$ per units but could vary by +/- 20%

- variable cost is 15$ per units but could vary by +/- 20%

- fixed costs are $ 1,000,000 per year

- ending working capital is 10% of revenue each year

- the company will be depreciated using a five years MACRS schedule.

- the estimated resale value of the system is 4,000,000$ at the end of the project in three year

- the tax rate is 21%

- the cost of capital is 14%

THE COMPANY HAS INVESTED 75,000$ IN CONSULTING WORK AND WILL INVEST 20,000,000$ IN THE NEW SECURITY EQUIPMENT.

calculate NPV, IRR and payback

since the cash flow are rough estimates and need refining, what can you do to compensate for the risk?