You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 65,000 units per year Unit price: $120 Variable cost: $72 Fixed cost: $2,190,000 The project will last for 10 years and requires an initial investment of $2.80 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%, and the required rate of return is 12%. However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $110. The good news is that fixed costs could be as low as $1,460,000, and variable costs would decline in proportion to sales. a. What is project NPV if all variables are as expected? Note: Do not round intermediate calculations. Enter your answer in thousands not in millions and round your answer to the nearest whole dollar amount. b. What is NPV in the bad-case scenario? Note: Do not round intermediate calculations. Enter your answer in thousands not in millions and round your answer to the nearest whole dollar amount. Negative amount should be indicated with a minus sign. a. NPV b. NPV
You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 65,000 units per year Unit price: $120 Variable cost: $72 Fixed cost: $2,190,000 The project will last for 10 years and requires an initial investment of $2.80 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%, and the required rate of return is 12%. However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $110. The good news is that fixed costs could be as low as $1,460,000, and variable costs would decline in proportion to sales. a. What is project NPV if all variables are as expected? Note: Do not round intermediate calculations. Enter your answer in thousands not in millions and round your answer to the nearest whole dollar amount. b. What is NPV in the bad-case scenario? Note: Do not round intermediate calculations. Enter your answer in thousands not in millions and round your answer to the nearest whole dollar amount. Negative amount should be indicated with a minus sign. a. NPV b. NPV
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
Vijay
Transcribed Image Text:You are considering a proposal to produce and market a new sluffing machine. The most likely
outcomes for the project are as follows:
Expected sales: 65,000 units per year
Unit price: $120
Variable cost: $72
Fixed cost: $2,190,000
The project will last for 10 years and requires an initial investment of $2.80 million, which will be
depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%,
and the required rate of return is 12%.
However, you recognize that some of these estimates are subject to error. In one scenario a
sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the
project and, if that happens, the unit price would probably be only $110. The good news is that
fixed costs could be as low as $1,460,000, and variable costs would decline in proportion to
sales.
a. What is project NPV if all variables are as expected?
Note: Do not round intermediate calculations. Enter your answer in thousands not in
millions and round your answer to the nearest whole dollar amount.
b. What is NPV in the bad-case scenario?
Note: Do not round intermediate calculations. Enter your answer in thousands not in
millions and round your answer to the nearest whole dollar amount. Negative amount
should be indicated with a minus sign.
a. NPV
b. NPV
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education