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 5 years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 14 percent and the company has a 25 percent tax rate.

		Pessimistic				Expected				Optimistic
	Market size		115,000				125,000				137,000
	Market share		18	%			22	%			24	%
	Selling price	$	165			$	170			$	174
	Variable costs per unit	$	108			$	104			$	101
	Fixed costs per year	$	980,000			$	925,000			$	895,000
	Initial investment	$	1,675,000			$	1,525,000			$	1,505,000

Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1