Question
In: Finance
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 70...
The most likely outcomes for a particular project are estimated as follows:
| Unit price: | $ | 70 | |
| Variable cost: | $ | 50 | |
| Fixed cost: | $ | 300,000 | |
| Expected sales: | 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 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $2.2 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%.
(For all the requirements, a negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.)
a. What is project NPV in the best-case scenario, that is, assuming all variables take on the best possible value?
b. What is project NPV in the worst-case scenario?
Solutions
Expert Solution
a
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |||
| Cost of new machine | -2200000 | |||||||||||||
| =Initial Investment outlay | -2200000 | |||||||||||||
| 100.00% | ||||||||||||||
| Unit sales | 44000 | 44000 | 44000 | 44000 | 44000 | 44000 | 44000 | 44000 | 44000 | 44000 | ||||
| Profits | =no. of units sold * (sales price - variable cost) | 1408000 | 1408000 | 1408000 | 1408000 | 1408000 | 1408000 | 1408000 | 1408000 | 1408000 | 1408000 | |||
| Fixed cost | -270000 | -270000 | -270000 | -270000 | -270000 | -270000 | -270000 | -270000 | -270000 | -270000 | ||||
| -Depreciation | Cost of equipment/no. of years | -220000 | -220000 | -220000 | -220000 | -220000 | -220000 | -220000 | -220000 | -220000 | -220000 | 0 | =Salvage Value | |
| =Pretax cash flows | 918000 | 918000 | 918000 | 918000 | 918000 | 918000 | 918000 | 918000 | 918000 | 918000 | ||||
| -taxes | =(Pretax cash flows)*(1-tax) | 725220 | 725220 | 725220 | 725220 | 725220 | 725220 | 725220 | 725220 | 725220 | 725220 | |||
| +Depreciation | 220000 | 220000 | 220000 | 220000 | 220000 | 220000 | 220000 | 220000 | 220000 | 220000 | ||||
| =after tax operating cash flow | 945220.00 | 945220.00 | 945220 | 945220 | 945220 | 945220 | 945220 | 945220 | 945220 | 945220 | ||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | ||||||||||||
| =Terminal year after tax cash flows | 0 | |||||||||||||
| Total Cash flow for the period | -2200000 | 945220 | 945220 | 945220 | 945220 | 945220 | 945220 | 945220 | 945220 | 945220 | 945220 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.12 | 1.2544 | 1.404928 | 1.5735194 | 1.7623417 | 1.9738227 | 2.210681407 | 2.4759632 | 2.773079 | 3.105848 | ||
| Discounted CF= | Cashflow/discount factor | -2200000 | 843946.43 | 753523.6 | 672788.93 | 600704.4 | 536343.21 | 478877.87 | 427569.5253 | 381758.5 | 340855.8 | 304335.5 | ||
| NPV= | Sum of discounted CF= | 3140703.81 | ||||||||||||
b
jeff jeffy answered 2 months agoRelated Solutions
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 70...
The most likely outcomes for a particular project are estimated
as follows:
Unit price: $ 70
Variable cost: $ 50
Fixed cost: $ 300,000
Expected sales: 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 10%
higher or 10% lower than the initial estimate. The project will
last for 10 years and requires an initial investment of $2.2
million, which will be depreciated...
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 60...
The most likely outcomes for a particular project are estimated
as follows:
Unit price:
$
60
Variable
cost:
$
40
Fixed cost:
$
420,000
Expected
sales:
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...
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 50...
The most likely outcomes for a particular project are
estimated as follows:
Unit price: $ 50
Variable cost: $ 30
Fixed cost: $ 340,000
Expected sales: 35,000 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 $1.4 million, which will be depreciated...
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 50...
The most likely outcomes for a particular project are estimated
as follows:
Unit price:
$
50
Variable
cost:
$
30
Fixed cost:
$
410,000
Expected
sales:
40,000
units per
year
Modern Artifacts can produce keepsakes that will be sold for $60
each. Nondepreciation fixed costs are $1,400 per year, and variable
costs are $30 per unit. The initial investment of $5,000 will be
depreciated straight-line over its useful life of 5 years to a
final value of zero, and the...
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 50...
The most likely outcomes for a particular project are estimated
as follows:
Unit price:
$
50
Variable cost:
$
30
Fixed cost:
$
490,000
Expected sales:
48,000
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 $2.3
million, which will be depreciated...
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 60...
The most likely outcomes for a particular project are estimated
as follows:
Unit price:
$
60
Variable cost:
$
40
Fixed cost:
$
420,000
Expected sales:
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...
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 60...
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: $ 50...
The most likely outcomes for a particular project are estimated
as follows:
Unit price:
$
50
Variable cost:
$
30
Fixed cost:
$
360,000
Expected sales:
35,000
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 $1.6
million, which will be depreciated...
The most likely outcomes for a particular project are estimated as follows: Unit price: $ 80...
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: $ 80...
The most likely outcomes for a particular project are estimated
as follows:
Unit price: $ 80
Variable cost: $ 60
Fixed cost: $ 440,000
Expected sales: 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 $1.1 million,
which will be depreciated...
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