The most likely outcomes for a particular project are estimated as follows:
| Unit price | $44 |
| Variable cost | $20 |
| Fixed cost | $300,000 |
| Expected sales | 28,300 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 5% higher or 5% lower than the initial estimate. The project will last for 14 years and requires an initial investment of $1.4 million, which will be depreciated straight-line over the project life to a final value of zero. The firm’s tax rate is 35%, and the required rate of return is 17%.
a. What is project NPV in the “best case” scenario, that is, assuming all variables take on the best possible value?
b. What about the “worst case” scenario?
Vine Corporation has provided the following data concerning an investment project that it is considering:
| Initial investment | $100,000 |
| Working capital | $73,000 |
| Annual cash flow | $40,000 per year |
| Salvage value at the end of the project | $29,000 |
The working capital would be released for use elsewhere at the end of the project in 4 years. The company’s discount rate is 13%.
The net present value of the project is _____.
Muncy, Inc., is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cash flows of $816,822, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment?
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