Gouhua Zhang has made the following assumptions for a capital budgeting project: Fixed capital investment...

 

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Gouhua Zhang has made the following assumptions for a capital budgeting project: ■ Fixed capital investment is 20,000; no investment in net working capital is required. ■ The project has an expected five-year life. ■ The fixed capital is depreciated straight-line to zero over a five-year life. The salvage value is normally distributed with an expected value of 2,000 and a standard deviation of 500. Unit sales in Year 1 are normally distributed with a mean of 2,000 and a standard deviation of 200. Unit sales growth after Year 1 is normally distributed with a mean of 6 percent and standard deviation of 4 percent. Assume the same sales growth rate for Years 2-5. ■ The sales price is 5.00 per unit, normally distributed with a standard devi- ation of 0.25 per unit. The same price holds for all five years. ■ Cash operating expenses as a percentage of total revenue are normally distributed with a mean and standard deviation of 30 percent and 3 per- cent, respectively. ■ The discount rate is 12 percent and the tax rate is 40 percent. 1 What are the NPV and IRR using the expected values of all input variables? 2 Perform a simulation analysis and provide probability distributions for the NPV and IRR. Gouhua Zhang has made the following assumptions for a capital budgeting project: ■ Fixed capital investment is 20,000; no investment in net working capital is required. ■ The project has an expected five-year life. ■ The fixed capital is depreciated straight-line to zero over a five-year life. The salvage value is normally distributed with an expected value of 2,000 and a standard deviation of 500. Unit sales in Year 1 are normally distributed with a mean of 2,000 and a standard deviation of 200. Unit sales growth after Year 1 is normally distributed with a mean of 6 percent and standard deviation of 4 percent. Assume the same sales growth rate for Years 2-5. ■ The sales price is 5.00 per unit, normally distributed with a standard devi- ation of 0.25 per unit. The same price holds for all five years. ■ Cash operating expenses as a percentage of total revenue are normally distributed with a mean and standard deviation of 30 percent and 3 per- cent, respectively. ■ The discount rate is 12 percent and the tax rate is 40 percent. 1 What are the NPV and IRR using the expected values of all input variables? 2 Perform a simulation analysis and provide probability distributions for the NPV and IRR.

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Solution to 1 Time Fixed capital Aftertax salvage value Price Output Reven... View the full answer