12.34.

Scenario Analysis:

You are the project manager for Eagle Golf Corporation. You are

considering manufacturing a new golf wedge with a unique groove design.

You have put

together the estimates in the following table about the potential demand for the new club, and the

associated selling and manufacturing prices. You expect to sell the club for five years. The

equipment required for the manufacturing process can be depreciated using straight line

depreciation over five years and will have a zero salvage value at the end of the projects life. No

additional capital expenditures are required. No new working capital is needed for the project.

The required return for projects of this type is 12 percent and the company has a 35 percent

marginal tax rate. You estimate that there is a 50 percent chance the project will achieve the

expected sales and a 25 percent chance of achieving either the weak or strong sales outcomes.

Should you recommend the project?

Strong Sales

Expected Sales

Weak Sales

Units sold

15,000

10,000

7,000

Selling price per unit

$130

$120

$110

Variable costs per unit

$70

$65

$60

Fixed Costs

$1,290,000

$1,290,000

$1,290,000

Initial Investment

$1,400,000

$1,400,000

$1,400,000