Reference no: EM132981513

Question - Suppose a Firm is considering the following project, The project requires an investment in year 0, in plant and equipment to the amount of $61,600.00.

The plant and equipment will be depreciated using the straight line manner over a period of 9 years, and will have a salvage value at the end of 9 years equal to $7,504.00

The project is forecast to generate the sales of 4704 in year 1, rising to 25284 in year 5, then declining to 5452 in year 9, by which time the project ends.

The Inflation rate is forecast to be 2.65%, rising to 5.85% in year 6, then levelling off.

The real cost of capital is forecast to be 10.65%, declining to 8.85% in year 5, then again rising to 9.35%in year 9.

The tax is forecast to increase from 34.00% in year 0 to 36.50% in year 6, then levelling off.

Sales Revenue per unit is forecast to be $21.60 in year 1 and then grow with inflation.

Variable Cost per unit is forecast to be $12.81 in year 1 and then grow with inflation.

Cash fixed Cost per unit is forecast to be $3,880.00 in year 1 and then grow with inflation.

A. What is the Project's NPV? What would you say about the project's acceptance according to the NPV acceptance criteria? Explain.

B. Assume all the sales projections were done before the start of pandemic (COVID-19) and are believed to be over-projected. The sales projections are expected to be hit by around 43% of the original estimated projections, ceteris paribus, What will be the NPV of the Project. Does that change the Project's acceptance criteria for the firm? Why?

C. Assume all the sales projections were made during the pandemic (COVID-19) and are believed to be over-projected. The revised sales projections are expected to be up by around 51% of the original estimated projections, ceteris paribus, What will be the NPV of the Project. Does that change the Project's acceptance criteria for the firm? Why?