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

Question

The most likely outcomes for a particular project are estimated as follows: However. you recognize that some of these estimates are subject to error. Suppose that each variable may turn cut to be either 10% higher or 10% lower than the initial estimate. The project veil last for 10 years and requires an initial investment of $1.8 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 40% and the required rate of return is 10%. What is project NPV in the best-case scenario, that is, assuming all variables take on the best possible value? (A negative amount should bo 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) What is project NPV m the worst case scenario? (A 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. Assume all tax losses can be applied to other taxable gains each year.)

Explanation / Answer

Best Case Scenerio ( Unit Price and Expected Sales Increases , Variable Cost and Fixed Cost Decreases) Unit Price=SP=60*(1+0.10) 66 Variable Cost=VC=40*(1-0.10) 36 Fixed Cost=FC=390000*(1-0.10) 351000 Expected Sales=Q=38000*(1+0.10) 41800 Operating Income =Q*(SP-VC)-FC Operating Income =41800*(66-36)-351000 903000 Operating Income after tax of 40%=(1-0.40)*903000 (A) 541800 Depriciation per Year=1800000/10 180000 Depriciation Tax shield=0.40*180000 (B) 72000 Total Cash Inflow (A+B) 613800 Annuity value of above cash flow for 10 years when the expected rate of return is 10% =6.1446*613800 3771555 (a)NPV=Annuity Value of Cash Inflow-Initial Investment=3771555-1000000 2771555 Worst Case Scenerio ( Unit Price and Expected Sales decreases , Variable Cost and Fixed Cost Increase) Unit Price=SP=60*(1-0.10) 54 Variable Cost=VC=40*(1+0.10) 44 Fixed Cost=FC=390000*(1+0.10) 429000 Expected Sales=Q=38000*(1-0.10) 34200 Operating Income =Q*(SP-VC)-FC Operating Income =34200*(54-44)-429000 (A) -87000 Operating Income is negative and so no tax Depriciation per Year=1800000/10 180000 Depriciation Tax shield=0.40*180000 (B) 72000 Total Cash Inflow (A+B) -15000 Annuity value of above cash flow for 10 years when the expected rate of return is 10% =6.1446*15000 -92169 (b)NPV=Annuity Value of Cash Inflow-Initial Investment=-92169-1000000 -1092169

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