We are evaluating a project that costs $520,000, has a life of 6 years, and has no
salvage value. Assume that depreciation is straight-line to zero over the life of the
project. Sales are projected at 73,000 units per year. Price per unit is $45, variable cost
per unit is $30, and fixed costs are $840,000 per year. The tax rate is 21 percent, and we
require a retum of 15 percent on this project. 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. (A negative answer should be indicated by a
minus sign. Do not round intermediate calculations and round your answers to 2
decimal places, e.g., 32.16.)
Best-case NPV
Worst-case NPV
McGilla Golf is evaluating a new line of golf clubs. The clubs will sell for $1,040 per set
and have a variable cost of $470 per set. The company has spent $167,500 for a
marketing study that determined the company will sell 52,500 sets per year for seven
years. The marketing study also determined that the company will lose sales of 9,900
sets of its high-priced clubs. The high-priced clubs sell at $1,540 and have variable costs
of $670. The company also will increase sales of its cheap clubs by 12,500 sets. The
cheap clubs sell for $470 and have variable costs of $200 per set. The fixed costs each
year will be $9,850,000. The company has also spent $1,275,000 on research and
development for the new clubs. The plant and equipment required will cost
$32,550,000 and will be depreciated on a straight-line basis to a zero salvage value.
The new clubs will also require an increase in net working capital of $2,650,000 that will
be returned at the end of the project. The tax rate is 21 percent, and the cost of capital is
15 percent.
Suppose you feel the units, price, variable cost, and fixed costs are accurate to within
only ±10 percent. What are the best-case and worst-case NPVs? (Hint: The price and
variable costs for the two existing sets of clubs are known with certainty, only the sales
gained or lost are uncertain.) (A negative amount should be indicated by a minus sign.
Do not round intermediate calculations and round your answers to 2 decimal places,
e.g., 32.16.)
Best-case
Worst-case
