What is project NPV in the worst-case scenario

Assignment Help Financial Management

Reference no: EM131070672

The most likely outcomes for a particular project are estimated as follows:

Unit price: $50

Variable cost: $30

Fixed cost: $320,000

Expected sales: $31,000 units per year

However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.5 million, which will be depreciated straight-line over the project life to a final value of zero. The firm’s tax rate is 35% and the required rate of return is 12%.

a. What is project NPV in the “best-case scenario,” that is, assuming all variables take on the best possible value? (Negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

b. What is project NPV in the worst-case scenario? (Negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

Reference no: EM131070672

Questions Cloud

Dividend discount model and discounted cash flow model : You have been asked to perform a stock valuation prior to the annual shareholders meeting next week. The two models you’ve selected to value the firm are 1) the dividend discount model and 2) the discounted cash flow model.

In perfect world capital market : In a "perfect world" capital market, how important is a firm’s decision to pay dividends versus repurchase shares? Under what conditions would you have a tax preference for share repurchase rather than dividends?

What will be accounting and NPV break-even levels of sales : Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondepreciation fixed costs are $1,100 per year and variable costs are $60 per unit. What will be the accounting and NPV break-even levels of sales, if the firm's tax rate is 40%?

Beneficial interest in transferred receivables equal : In December 2016, Bay Watch Company factored accounts receivable that had a book value of $500,000 to Spirit Bank, with recourse and estimates the fair value of the recourse obligation to be $10,000. Under this arrangement, Klein provides Bay Watch w..

What is project NPV in the worst-case scenario : However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10% lower than the initial estimate. What is project NPV in the “best-case scenario,” that is, assuming all v..

What is the NPV break-even level of sales assuming tax rate : Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $120. The materials cost for a standard diamond is $60. The fixed costs incurred each year for factory upkeep and administrative expenses are $212,000. Wh..

Earnings before interest and taxes-debt ratio : Siracha Company has currently has $10,000,000 in equity and $0 in debt. Their earnings before interest and taxes (EBIT) of $1,000,000. Siracha Company is considering a 20% debt ratio, and at this level, could acquire capital at 8% interest. The appli..

Find company net income at debt level : Siracha Company has currently has $10,000,000 in equity and $0 in debt. Their earnings before interest and taxes (EBIT) of $1,000,000. Siracha Company is considering a 60% debt ratio, and at this level, could acquire capital at 9% interest. The appli..

Gain or loss per contract on the position spread : If an investor is long May Wheat and it is initially trading at 4.25 and short the September Wheat contract which is trading at 4.75. One month later the May Corn contract is closed at 4.50 and Sept Corn closed at 4.25, the gain or loss per contract ..

User Account

All Pages