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 d those of mates are subject to error Suppose test 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 8 million, which we 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 ration is 10%. What is project NPV in the best case scenario, that is assuming el variables take on the best possible value? (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) What is project NPV in 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

A./

THE BEST CASE NPV

NPV

= ($1800000) + $613800 * PVIFA 10%, 10 PERIODS

= ($1800000) + $613800 * 6.1446

= ($1800000) + $3771555

= $1971555

B./

THE WORST CASE NPV

NPV

= ($1800000) + $613800 * PVIFA 10%, 10 PERIODS

= ($1800000) + $19800 * 6.1446

= ($1800000) + $121663

= ($1678337)

DESCRIPTION AMOUNT $ SALES [(38000 * 110%) * ($60 * 110%)] $2758800 LESS VARAIBLE COST [(38000 * 110%) * ($40 * 90%)] ($1504800) LESS FIXED COST ($390000 * 90%) ($351000) LESS DEPRICIATION ($1800000 / 10 YEARS) ($180000) PROFIT BEFORE TAX $723000 LESS TAX @40% ($289200) PROFIT AFER TAX $433800 ADD DEPRICIATION (AS NON CASH ITEM) $180000 NET CASH FLOW PER YEAR $613800

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