Question
Your company is considering taking on a 3-year project with the following details:The project will generate $900 in sales in year 1, but the sales
Your company is considering taking on a 3-year project with the following details:The project will generate $900 in sales in year 1, but the sales in subsequent years are uncertain. Although the sales growth rate is uncertain, it is assumed to be normally distributed with a mean of 3% and a standard deviation of 1.50%. Variable costs are assumed to be 20% percent of sales each year. Fixed costs will be $445 per year, while net working capital (NWC) is set at 10% of total sales each year (beginning in year 1). The project will require an initial investment in NWC of $75 at year 0. None of the investment in NWC will be recovered at end of the project. To operate the project, a new piece of equipment must be purchased at a cost of $575. The equipment will be depreciated to 0 using 3-year straight line depreciation. The equipment will have no salvage value at the end of the project. The tax rate is 25%. The cost of capital for the project is 9%. A. Set up a spreadsheet that calculates the NPV of the project while capturing the uncertainty in sales. B. Simulate the NPV 750 times using a data table. Find the average and standard deviation (using sample formula) of NPV.C. Graph the frequency distribution of the NPV using a bar/column chart. D. Calculate the probability that the NPV is positive. What is your recommendation regarding the project? Why?
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