Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Problem 10-9 Scenario Analysis (LO3) The most likely outcomes for a particular project are estimated as follows: \table[[Unit price:,$70

Problem 10-9 Scenario Analysis (LO3)
The most likely outcomes for a particular project are estimated as follows:
Unit price:
Variable cost:
Fixed cost:
Expected sales:
$ 70
$ 50
$ 300,000
40,000 units per year
However, you recognize that some of these estimates are subject to error. Suppose each variable turns out to be either 10% higher or
10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $2-2 million, which will be
depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 21%, and the required rate of return is 12%.
a. What is project's NPV in the best-case scenario, that is, assuming all variables take on the best possible value?
b. What is project's NPV in the worst-case scenario?
Note: For all the requirements, a negative amount should be indicated by a minus sign. Enter your answers in dollars, not in
millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount.
a. NPV
b. NPV
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Transcribed Image Text:Problem 10-9 Scenario Analysis (LO3) The most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: Expected sales: $ 70 $ 50 $ 300,000 40,000 units per year However, you recognize that some of these estimates are subject to error. Suppose each variable turns out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $2-2 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 21%, and the required rate of return is 12%. a. What is project's NPV in the best-case scenario, that is, assuming all variables take on the best possible value? b. What is project's NPV in the worst-case scenario? Note: For all the requirements, a negative amount should be indicated by a minus sign. Enter your answers in dollars, not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount. a. NPV b. NPV
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