Question

^{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 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%. a. What is project NPV in the best-case scenario, that is, assuming all variables take on the best possible value? (A negetlve emount should be Indlcated by a minus sign. Enter your answer In dollers not In millions. Do not round Intermedlete calculetions. Round your answer to the nearest doller emount.) NPV b. What is project NPV in the worst-case scenario? (A negative amount should be Indicated by e minus sign. Enter your answer In dollars not In millions. Do not round Intermediate calculations. Round your answer to the nearest dollar。mount.) NPV This is a numeric cel, so please enter numbers only}

Answer 1

In Best case Scenario, Sales Price and units sales will be taken at the highest possible value and costs at the lowest possible values.

NPV of the project is the present value of future cash flows discounted at the required rate of return less the initial investment.