Check my work The most likely outcomes for a particular project are estimated as

Question

Check my work The most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: 60 $390,000 Expected sales: 38,000 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 $1.8 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%. a. What is project NPV in the best-case scenario, that is, assuming all 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.) NPV acoscenario? (A negative

Explanation / Answer

Depr./Year = 1,800,000 = 180,000

With Best Case Scenario
Unit Price = 1.1*60 = 66
Variable Costs = 0.9*40 = 36
Fixed Costs = 390,000*0.9 = 351,000
Sales = 38,000*1.1 = 41,800

EBIT = 41,800*(66-36) - 351,000 - 180,000 = 723,000
Net Income = EBIT*(1-Taxes) = 723,000*(1-0.4) = 433,800

FCF = Net Income + Depr. = 433,800 + 180,000 = 613,800

NPV (Using NPV function in Excel) [ -1,800,000 + NPV(10%, Cash Flows 1 to 10)] = 1,971,535.29

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