Suppose that a company is considering an investment in a new product with a 5-year horizon...

Free

90.2K

Verified Solution

Question

Finance

Suppose that a company is considering an investment in a newproduct with a 5-year horizon (product will be sold for 5 years).The upfront investment is $1 million and it is assumed todepreciate on a straight-line basis for 5 years, with no residualvalue. Fixed costs are assumed to be $50,000 per year. The companyestimates the variable cost per unit (v) to be $5 and expects tosell each unit for $15. There are no taxes and the required rate ofreturn is 8% per year.

The company estimates that they will be able to sell 32,000 unitsduring the year under normal circumstances (base case), but theybelieve that actual sales could be 10% lower than 32,000 (worstcase) or 10% higher than 32,000 (best case).
Base Case NPV =
Worst Case NPV =
Best Case NPV =

Answer & Explanation Solved by verified expert

3.7 Ratings (315 Votes)

		Base Case					Worst Case						Best Case
Year	0	1	2	3	4	5	0	1	2	3	4	5	0	1	2	3	4	5
Initial Investment	($1,000,000)						($1,000,000)						($1,000,000)

Number of unit sold		32000						28800						35200

Revenue from sales(@$15/unit)		$480,000	$480,000	$480,000	$480,000	$480,000		$432,000	$432,000	$432,000	$432,000	$432,000		$528,000	$528,000	$528,000	$528,000	$528,000
Fixed cost		($50,000)	($50,000)	($50,000)	($50,000)	($50,000)		($50,000)	($50,000)	($50,000)	($50,000)	($50,000)		($50,000)	($50,000)	($50,000)	($50,000)	($50,000)
Variable Cost		($160,000)	($160,000)	($160,000)	($160,000)	($160,000)		($144,000)	($144,000)	($144,000)	($144,000)	($144,000)		($176,000)	($176,000)	($176,000)	($176,000)	($176,000)
Cash from Operation		$270,000	$270,000	$270,000	$270,000	$270,000		$238,000	$238,000	$238,000	$238,000	$238,000		$302,000	$302,000	$302,000	$302,000	$302,000
Depreciation		($200,000)	($200,000)	($200,000)	($200,000)	($200,000)		($200,000)	($200,000)	($200,000)	($200,000)	($200,000)		($200,000)	($200,000)	($200,000)	($200,000)	($200,000)

Net Cash flow from operation		$70,000	$70,000	$70,000	$70,000	$70,000		$38,000	$38,000	$38,000	$38,000	$38,000		$102,000	$102,000	$102,000	$102,000	$102,000
Tax		0	0	0	0	0		0	0	0	0	0		0	0	0	0	0
Cash flow after tax		$70,000	$70,000	$70,000	$70,000	$70,000		$38,000	$38,000	$38,000	$38,000	$38,000		$102,000	$102,000	$102,000	$102,000	$102,000
Plus depreciation		$200,000	$200,000	$200,000	$200,000	$200,000		$200,000	$200,000	$200,000	$200,000	$200,000		$200,000	$200,000	$200,000	$200,000	$200,000

Cash flow from operation		$270,000	$270,000	$270,000	$270,000	$270,000		$238,000	$238,000	$238,000	$238,000	$238,000		$302,000	$302,000	$302,000	$302,000	$302,000

Rate of return	8%
PV( cash flow from Operation)	($1,000,000)	$250,000	$231,481	$214,335	$198,458	$183,757	($1,000,000)	$220,370	$204,047	$188,932	$174,937	$161,979	($1,000,000)	$279,630	$258,916	$239,737	$221,979	$205,536

NPV	$78,032						($49,735)						$205,798

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Suppose that a company is considering an investment in a new product with a 5-year horizon...

Free

90.2K

Verified Solution

Question

Finance

Answer & Explanation Solved by verified expert

Get Answers to Unlimited Questions

Membership Benefits:

Transcribed Image Text

Other questions asked by students