Reference no: EM132478303

Jimmy is a farmer, who is considering an expansion project to produce apples. The trial expansion will last for 4 years.

It will require a capital investment of $1,000,000, and additional net operating working capital of $150,000.

Jimmy expects to sell 10,000 bottles of wine each year at $98/bottle.

The variable cost is $60/bottle, and total fixed costs are $200,000.

Each of these are expected to be constant over the 4 year life of the project.(You might use the Excel)

a. Assuming a tax rate of 40%, WACC of 10%, straight-line depreciation, and a salvage value of $50,000, evaluate the NPV of the project.

b. Perform sensitivity analysis to unit price-let there be a 40% chance price is $20, and a 60% that price is $150. Determine the new NPV based on these possible outcomes.

c. If the apple is successful and price is $150, there will be spillover effects to the company's other apples. This will lead to company growth of approximately $1,000,000 in value at the end of the project. Estimate the new NPV of the project.