You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 65,000 units per year Unit price: $120 Variable cost: $72 Fixed cost: $2,190,000 The project will last for 10 years and requires an initial investment of $2.80 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%, and the required rate of return is 12%. However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $110. The good news is that fixed costs could be as low as $1,460,000, and variable costs would decline in proportion to sales. a. What is project NPV if all variables are as expected? Note: Do not round intermediate calculations. Enter your answer in thousands not in millions and round your answer to the nearest whole dollar amount. b. What is NPV in the bad-case scenario? Note: Do not round intermediate calculations. Enter your answer in thousands not in millions and round your answer to the nearest whole dollar amount. Negative amount should be indicated with a minus sign. a. NPV b. NPV
You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 65,000 units per year Unit price: $120 Variable cost: $72 Fixed cost: $2,190,000 The project will last for 10 years and requires an initial investment of $2.80 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%, and the required rate of return is 12%. However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $110. The good news is that fixed costs could be as low as $1,460,000, and variable costs would decline in proportion to sales. a. What is project NPV if all variables are as expected? Note: Do not round intermediate calculations. Enter your answer in thousands not in millions and round your answer to the nearest whole dollar amount. b. What is NPV in the bad-case scenario? Note: Do not round intermediate calculations. Enter your answer in thousands not in millions and round your answer to the nearest whole dollar amount. Negative amount should be indicated with a minus sign. a. NPV b. NPV
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 13P
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Vijay
Transcribed Image Text:You are considering a proposal to produce and market a new sluffing machine. The most likely
outcomes for the project are as follows:
Expected sales: 65,000 units per year
Unit price: $120
Variable cost: $72
Fixed cost: $2,190,000
The project will last for 10 years and requires an initial investment of $2.80 million, which will be
depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%,
and the required rate of return is 12%.
However, you recognize that some of these estimates are subject to error. In one scenario a
sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the
project and, if that happens, the unit price would probably be only $110. The good news is that
fixed costs could be as low as $1,460,000, and variable costs would decline in proportion to
sales.
a. What is project NPV if all variables are as expected?
Note: Do not round intermediate calculations. Enter your answer in thousands not in
millions and round your answer to the nearest whole dollar amount.
b. What is NPV in the bad-case scenario?
Note: Do not round intermediate calculations. Enter your answer in thousands not in
millions and round your answer to the nearest whole dollar amount. Negative amount
should be indicated with a minus sign.
a. NPV
b. NPV
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