We are evaluating a project that costs $924,000, has a four-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 87,600 units per year. Price per unit is $34.55, variable cost per unit is $20.80, and fixed costs are $756,000 per year. The tax rate is 35 percent, and we require a return of 13 percent on this project. Required: Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-10 percent. Calculate the best-case and worst-case NPV figures.
Scenario analysis is a technique used to handle risk in capital budgeting. Scenario analysis involves what if analysis if several variables are changed simultaneously.
Answer and Explanation:
Best case NPV figures.
- In the best case scenario, all variables assume their optimistic values. So, the values of variables will be:
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from Information Systems: Help and ReviewChapter 4 / Lesson 14