Problem
The most likely outcomes for a particular project are estimated as follows
Unit price: $50
Variable cost: $30
Fixed cost: $410,000
Expected sales: 40,000 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 $1.4 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 14%.
a. What is project NPV in the best-case scenario, that is, assuming all variables take on the best possible value?
b. What is project NPV in the worst-case scenario?