Peacemaker Ltd, a newly formed manufacturing company is considering introducing a new product with the following possible outcomes: Worst Expected Best Selling price per unit ($) 21 26 35 Sales volume (units) 3 500 5 500 7 500 Variable cost per unit ($) 15 13 11 Fixed operating cost per year ($) 35 000 32 000 30 000 Economic life (in years) 3 4 5 Residual Value 0 0 0 The cost of plant and equipment required is expected to be N$100 000. Assume that taxation is not applicable and the company’s cost of capital is 11%. The fixed operating costs do not include depreciation and relate only to cash fixed overhead costs. Required: a) Calculate the net present value (NPV) for each of the three scenarios? b) Calculate the expected NPV of the project if the probability of the worst case scenario is 0.2, the expected case is 0.6 and the best case is 0.2? c) Undertake sensitivity analysis if selling price increase to $35 and if decrease to $21?
QUESTION 2
Peacemaker Ltd, a newly formed manufacturing company is considering introducing a new product with the following possible outcomes:
|
|
Worst |
Expected |
Best |
|
Selling price per unit ($) |
21 |
26 |
35 |
|
Sales volume (units) |
3 500 |
5 500 |
7 500 |
|
Variable cost per unit ($) |
15 |
13 |
11 |
|
Fixed operating cost per year ($) |
35 000 |
32 000 |
30 000 |
|
Economic life (in years) |
3 |
4 |
5 |
|
Residual Value |
0 |
0 |
0 |
The cost of plant and equipment required is expected to be N$100 000. Assume that
Required:
a) Calculate the
b) Calculate the expected NPV of the project if the probability of the worst case scenario is 0.2, the expected case is 0.6 and the best case is 0.2?
c) Undertake sensitivity analysis if selling price increase to $35 and if decrease to $21?
Step by step
Solved in 4 steps with 7 images
