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c. Now conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part b being 20% better than its base-case value, will occur. There is a 25% probability of worst-case conditions, with the variables 20% worse than base, and a 50% probability of base-case conditions. (Hint: Use Scenario Manager. Go to the Data menu, choose What-If-Analyis, the choose Scenario Manager. After you create the Scenario's, you can pick a scenario and type in the resulting NPV (but be sure to return the Scenario to the base-case afterward). Or you can create a Scenario Summary and use a cell reference to the Scenario Summary worksheet to show the NPV for each scenario.)

Unit Sales

Sales Price per Unit

Variable Costs per Unit

Scenario

Probability

NPV

Best Case

25%

1,200

$28.80

$14.40

Base Case

50%

1,000

$24.00

$18.00

Worst Case

25%

800

$19.20

$21.60

Expected NPV =

Standard Deviation =

Coefficient of Variation = Std Dev / Expected NPV =

d. If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, and payback.

CV range of firm's average-risk project:

0.8

to

1.2

Low-risk WACC =

8%

WACC =

10%

High-risk WACC =

13%

Risk-adjusted WACC =

Risk adjusted NPV =

IRR =

Payback =

e. On the basis of information in the problem, would you recommend that the project be accepted?