Question

You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for five years. The equipment required for the project has no salvage value and will be depreciated on a straight-line basis. The required return for projects of this type is 14 percent, and the company has a 35 percent tax rate. Pessimistic Expected Optimistic Market size 122,000 137,000 162,000 Market share 19 % 22 % 24 % Selling price $ 143 $ 148 $ 154 Variable costs per unit $ 97 $ 92 $ 91 Fixed costs per year $ 958,000 $ 913,000 $ 883,000 Initial investment $ 1,555,000 $ 1,470,000 $ 1,385,000 Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit.

Answer 1