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Consider a project with a 4-year life. The initial cost to set up the project is...

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?

Solutions

Expert Solution

1. BASE CASE

jeff jeffy answered 11 months ago
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