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
Related questions
Question
The company would like you to look at a new project. This project involves the purchase of a new $2,000,000 fully auto mated plasma cutter that can be used in our metal works division. The products manufactured using the new technol ogy are expected to sell for an average price of $300 per unit, and the company analyst expects that the firm can sell 20,000 units per year at this price for a period of five years. The cutter will have a residual or savage value of $200,000. at the end of the project's five-year te. The firm also expects to have to invest an additional $300,000 in working capital to support the new business. Other pertinent Information concerning the business venture is as follows:
(look at the picture attached)
a) Estimate the cash flows for the investment under the listed base-case assumptions. Calculate the project NPV for these cash flows.
b) Evaluate the NPV of the investment under the worst-case and best-case assumptions.
Transcribed Image Text:Initial cost of equipment
$2,000,000
Project and equipment life
5 years
Salvage value of equipment
$200,000
Working-capital requirement
$300,000
Depreciation method
Straight-line
Depreciation expense
$360,000
Discount rate or required rate of return
12%
Тах гate
30%
In addition, estimates for unit sales, selling price, variable cost
per unit, and cash fiked operating expenses for the base-
case, worst-case, and best-case scenarios are as follows:
Expected or
Base Case Worst Case Best Case
Unit sales
20,000
15,000
25,000
Price per unit
$
300 $
250 S
330
Variable cost per unit
$
(200) $
(210) $
(180)
Cash fixed costs per year $(500,000) $(450,000) S(350,000)
Depreciation expense
$ 360,000 $ 360,000 $ 360,000
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