The most likely outcomes for a particular project are estimated as follows:
Unit price: $50
Variable cost: $30
Fixed cost: $300,000
Expected sales: 30,000 units per year
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 million, which will be depreciated straight-line over the project life to a final value of zero. The firm’s tax rate is 21% 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?
What is project NPV in the worst-case scenario?
Initial investment = $1,000,000
BEST case scenario.
Unit price = 50 *1.1 = $55 / unit
Fixed cost (best case should be lower costs) = 300,000*0.9 = $270,000/year
Variable cost (best case should be lower costs) = 30 *0.9 = $27
Units sold= 30,000 *1.1 = $33,000
Profit per year, best case = (33000*55)-(27*33000)-270,000 = 1815000- 891000- 270,000= 654000
After taxes = 654000-21% of 654000= 516660
NPV = (516660 * NPV factor of annuity for year 10 rate 12%) - 1000000
= (516660*5.6502) - 1000000
= 2,919,232.332 - 1000000 = 1,919,232.332
Worst case scenario
Unit price = 50 *0.9 = $45 / unit
Fixed cost (worst case should be higher costs ) = 300,000*1.1 = $330,000/year
Variable cost (worst case should be higher costs ) = 30 *1.1 = $33
Units sold= 30,000 *0.9 = $27,000
Profit = (45*27000)-(33*27000)- 330,000 = 1215000 - 891000- 330000 = -6000
Since profit is negative, Taxes wont be paid
NPV = (-6000* NPV factor of annuity for year 10 rate 10%) - 1000000
(-6000*6.1446) - 1000000
= -36867-1000000= 1036867 loss
The most likely outcomes for a particular project are estimated as follows: Unit price: $50 Variable...
The most likely outcomes for a particular project are estimated as follows: Unit price: $50 Variable cost: $30 Fixed cost: $300,000 Expected sales: 30,000 units per year 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 million, which will be depreciated straight-line over the...
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 60 Variable cost: $ 40 Fixed cost: $ 250,000 Expected sales: 30,000 units per year 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 $1.2 million, which will be depreciated...
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 80 Variable cost: $ 60 Fixed cost: $ 380,000 Expected sales: 37,000 units per year However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 5% higher or 5% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.7 million, which will be depreciated...
The most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: Expected sales: $ 60 $ 40 $420,000 47,000 units per year 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 $2.1 million, which will be depreciated straight-line...
URGENTTT The most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: Expected sales: 80 68 $280,eee 30,eee units per year However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 5% higher or 5% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.0 million, which will be depreciated straight-line over...
The most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: Expected sales: $ 80 $ 60 $460,000 40,000 units per year However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 5% higher or 5% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.2 million, which will be depreciated straight-line...
The most likely outcomes for a particular project are estimated as follows: points Unit price: Variable cost: Fixed cost: Expected sales: $ 50 $ 30 $420,000 41,000 units per year ebook Print 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 $1.2 million, which will...
Problem 10-9 Scenarlo Analysls (LO3) The most likely outcomes for a particular project are estimated as follows: Unit price Variable cost: Fixed cost Expected sales: 58 30 $328,eee 31,808 units per year 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...
Variable cost: 20 Fixed cost: 350,000 Unit Price:40 Expected sales: 34,000 units per year 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 $1.2 million, which will be depreciated straight-line over the project life to a final value of zero. The firm’s tax rate is...
You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 115,000 units per year Unit price: $220 Variable cost: $132 Fixed cost: $4,890,000 The project will last for 10 years and requires an initial investment of $16.70 million, which will be depreciated straight-line over the project life to a final value of zero. The firm’s tax rate is 30%, and the required rate of return...