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 6 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 13 percent and the company has a 22 percent tax rate.

		Pessimistic				Expected				Optimistic
	Market size		122,000				132,000				144,000
	Market share		19	%			23	%			25	%
	Selling price	$	154			$	159			$	163
	Variable costs per unit	$	101			$	97			$	94
	Fixed costs per year	$	973,000			$	918,000			$	888,000
	Initial investment	$	1,944,000			$	1,794,000			$	1,774,000

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.)

1. Pessimistic:

2. Expected:

3. Optimistic:

Answer 1