Unit price: However, you recognize that some of these estimates are subject to e
ID: 2654875 • Letter: U
Question
Unit price:
However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.5 million, which will be depreciated straight-line over the project life to a final value of zero. The firm’s tax rate is 35% and the required rate of return is 12%.
What is project NPV in the “best-case scenario,” that is, assuming all variables take on the best possible value? AND what is the
"worst case scenrio?
Explanation / Answer
Normal Scenario Sales per year 1550000 Total cost per year 1250000 Profit before tax 300000 Tax 105000 Net Cashflow per year 195000 Normal Scenario Year Cashflows Present Value NPV 0 -1500000 -1500000.00 -398206.51 1 195000 174107.14 2 195000 155452.81 3 195000 138797.15 4 195000 123926.03 5 195000 110648.24 6 195000 98793.07 7 195000 88208.10 8 195000 78757.23 9 195000 70318.95 10 195000 62784.78 Best Scenario Sales per year 1875500 Total cost per year 1477300 Profit before tax 398200 Tax 139370 Net Cashflow per year 258830 Best Scenario Year Cashflows Present Value NPV 0 -1500000 -1500000.00 -37552.77 1 258830 231098.21 2 258830 206337.69 3 258830 184230.08 4 258830 164491.14 5 258830 146867.09 6 258830 131131.33 7 258830 117081.55 8 258830 104537.10 9 258830 93336.69 10 258830 83336.33 Worst Scenario Sales per year 1255500 Total cost per year 1041300 Profit before tax 214200 Tax 74970 Net Cashflow per year 139230 Worst Scenario Year Cashflows Present Value NPV 0 -1500000 -1500000.00 -713319.45 1 139230 124312.50 2 139230 110993.30 3 139230 99101.16 4 139230 88483.18 5 139230 79002.84 6 139230 70538.25 7 139230 62980.58 8 139230 56232.66 9 139230 50207.73 10 139230 44828.33
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