You are considering a proposal to produce and market a newsluffing machine. The most likely outcomes for the project are asfollows: Expected sales: 100,000 units per year
Unit price: $190
Variable cost: $114
Fixed cost: $4,080,000
The project will last for 10 years and requires an initialinvestment of $11.28 million, which will be depreciatedstraight-line over the project life to a final value of zero. Thefirm’s tax rate is 30%, and the required rate of return is 12%.However, you recognize that some of these estimates are subject toerror. Sales could fall 30% below expectations for the life of theproject and, if that happens, the unit price would probably be only$180. The good news is that fixed costs could be as low as$2,720,000, and variable costs would decline in proportion tosales.
a. What is project NPV if all variables are as expected?
