he most likely outcomes for a particular project are estimated as follows: Unit price: $50 Variable cost: $30 Fixed cost: $300,000 Expected sales: 30,000 units per year However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 12 percent higher or 12 percent lower than the initial estimate. The project will last for 5 years and requires an initial investment of $1 million, which will be depreciated straight-line over the project life to a final value of zero. The firm’s tax rate is 35 percent and the required rate of return is 12 percent. What is project NPV in the “best-case scenario,” that is, assuming all variables take on the best possible value? What about the worst-case scenario?
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The most likely outcomes for a particular project are estimated as follows:
Unit price: $50
Variable cost: $30
Fixed cost: $300,000
Expected sales: 30,000 units per year
However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 12 percent higher or 12 percent lower than the initial estimate. The project will last for 5 years and requires an initial investment of $1 million, which will be depreciated straight-line over the project life to a final value of zero. The firm’s tax rate is 35 percent and the required
What is project NPV in the “best-case scenario,” that is, assuming all variables take on the best possible value? What about the worst-case scenario?
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