In: Finance
Consider a project with a 4-year life. The initial cost to set up the project is $1,200,000. This amount is to be linearly depreciated to zero over the life of the project. You expect to sell the equipment for $240,000 after 4 years. The project requires an initial investment in net working capital of $120,000, which will be recouped at the end of the project.
You estimated sales of 52,000 units per year at a price of $177 each. The variable cost per unit is estimated to be $141.6 and fixed costs are $240,000 per year.
You expect unit sales, prices, variable and fixed costs to be within 15% of your estimates.
The required return is 13% and the tax rate is 34%.
1. What is the NPV in the base case?
2. What is the NPV in the pessimistic case?
3. What is the NPV in the optimistic case?