The estimates that might be off by 10% (either above or below) associated with t

Question

The estimates that might be off by 10% (either above or below) associated with this new product are:

Unit price - 125

Variable costs - 75

Fixed costs - 250,000

Expected sales - 10,000 per year

Assime that this new product line will require an initial outlay of $1 million, with no working capital investment, and will last for 10 years, being depreciated down to zero using straight line depreciation. In addition, the firm's rate of required rate of return or cost of capital is 10%, while the firm's marginal tax rate is 34%. Calculate the project's NPV under the "best case scenario" (that is, use the high estimates - unit price 10% above expected, variable costs 10% less than expected, fixed costs 10% less than expected, and expected sales 10% more than expected). Calculate the project's NPV under the "worst case scenario."

                                                           Expected   or             

                                                           Best Case                Worst Case                   Best Case

  Unit Sales                                10,000.00

Price per unit                                    125.00

Variable cost per unit                        75.00

Cash fixed cost per year        250,000.00

Depreciation expense           

Explanation / Answer

http://people.umass.edu/som640/ps6.pdf

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