You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes

Fantastic news! We've Found the answer you've been seeking!

Question:

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: 75,000 units per year
Unit price: $140
Variable cost: $84
Fixed cost: $2,730,000
The project will last for 10 years and requires an initial investment of $4.48 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. Sales could fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $180. The good news is that fixed costs could be as low as $2,720,000, and variable costs would decline in proportion to sales.

a. What is project NPV if all variables are as expected?

b. What is NPV in the worst-case scenario?