The most likely outcomes for a particular project are estimated as follows: Unit price: $ 70 Variable cost:...

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Finance

The most likely outcomes for a particular project are estimatedas follows:
Unit price: $ 70
Variable cost: $ 50
Fixed cost: $ 300,000
Expected sales: 40,000 units per year
However, you recognize that some of these estimates are subjectto error. Suppose that each variable may turn out to be either 10%higher or 10% lower than the initial estimate. The project willlast for 10 years and requires an initial investment of $2.2million, which will be depreciated straight-line over the projectlife to a final value of zero. The firm’s tax rate is 30% and therequired rate of return is 12%
. a. What is project NPV in the best-case scenario, that is,assuming all variables take on the best possible value? (A negativeamount should be indicated by a minus sign. Enter your answer indollars not in millions. Do not round intermediate calculations.Round your answer to the nearest dollar amount.)
b. What is project NPV in the worst-case scenario? (A negativeamount should be indicated by a minus sign. Enter your answer indollars not in millions. Do not round intermediate calculations.Round your answer to the nearest dollar amount.)

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4.2 Ratings (601 Votes)

First lets find out the values of unit sales sales price variable cost and Fixed price in best and worst case scenario Best case Worst Case Sales 40000 44000 36000 Unit price 70 77 63 Variable cost 50 45 55 Fixed Cost 300000 270000 330000 In best case sales price and Unit price will increase by 10 and variable and fix will reduce by 10 in worst case scenario Sales price and unit price will decrease by 10 and variable and fix will See Answer

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The most likely outcomes for a particular project are estimatedas follows:Unit price: $ 70Variable cost: $ 50Fixed cost: $ 300,000Expected sales: 40,000 units per yearHowever, you recognize that some of these estimates are subjectto error. Suppose that each variable may turn out to be either 10%higher or 10% lower than the initial estimate. The project willlast for 10 years and requires an initial investment of $2.2million, which will be depreciated straight-line over the projectlife to a final value of zero. The firm’s tax rate is 30% and therequired rate of return is 12%. a. What is project NPV in the best-case scenario, that is,assuming all variables take on the best possible value? (A negativeamount should be indicated by a minus sign. Enter your answer indollars not in millions. Do not round intermediate calculations.Round your answer to the nearest dollar amount.)b. What is project NPV in the worst-case scenario? (A negativeamount should be indicated by a minus sign. Enter your answer indollars not in millions. Do not round intermediate calculations.Round your answer to the nearest dollar amount.)