3. The most likely outcomes for a particular project are estimated as follows: Unit Price:...
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3. The most likely outcomes for a particular project are estimated as follows: Unit Price: $50 Variable Cost: $30 Fixed Cost: $300,000 Expected Sales: 30,000 units/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 original estimate. The project will last for 10 years and requires an initial investment of $1 million, which will be depreciated straight-line over the project life to a final value of zero. The firms tax rate is 35%, and the required rate of return is 12%. What is the projects NPV in the most likely scenario? What is the projects NPV in the best-case scenario? What is the projects NPV in the worse-case scenario? If the probability of the three scenarios above are 20%, 60%, and 20%, what is the expected NPV of the project? Would you accept it given this estimate?
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