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		116,000				131,000				156,000
	Market share		19	%			22	%			24	%
	Selling price	$	149			$	154			$	160
	Variable costs per unit	$	103			$	98			$	97
	Fixed costs per year	$	964,000			$	919,000			$	889,000
	Initial investment	$	1,585,000			$	1,500,000			$	1,415,000

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

Pessimistic		$
Expected		$
Optimistic		$

Answer 1