Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
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You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphite like material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for four years. The equipment required for the project has no salvage value. The required return for projects of this type is 12 percent, and the company has a 34 percent tax rate. |
| Pessimistic | Expected | Optimistic | |||||||||||
| Market size | 121,000 | 136,000 | 161,000 | ||||||||||
| Market share | 21 | % | 24 | % | 26 | % | |||||||
| Selling price | $ | 144 | $ | 149 | $ | 155 | |||||||
| Variable costs per unit | $ | 98 | $ | 93 | $ | 92 | |||||||
| Fixed costs per year | $ | 959,000 | $ | 914,000 | $ | 884,000 | |||||||
| Initial investment | $ | 1,248,000 | $ | 1,180,000 | $ | 1,112,000 | |||||||
| Calculate the NPV for each case for this project |
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